Accounting for overheads

Question 1

What are direct costs like

Answer 1

Direct costs are easily and objectively traced to a specific cost object

Question 2

What are examples of direct costs

Answer 2

Examples of direct costs are: raw materials, direct labout

Question 3

What are indirect costs (overheads) like

Answer 3

Indirect costs cannot be traced directly to cost objects

Question 4

How are overheads allocated

Answer 4

Overheads are allocated using cost drivers

Question 5

How must allocation bases be linked with overheads

Answer 5

With overheads allocation bases must be casually linked to cost behaviour for reliable cost estimates

Question 6

What are the different purposes of assigning overheads

Answer 6

Purposes of assigning overheads are:
1. Inventory valuation
2. Cost information

Question 7

What is inventory valuation done for

Answer 7

Inventory valuation is for external reporting

Question 8

What is cost information for

Answer 8

Cost information is for internal decision-making

Question 9

What are the two costs for absorption costing

Answer 9

The two-stage allocation process is:
- Stage 1: Allocate or apportion overheads to cost centres
- Stage 2: Reapportion service department costs to production departments
- Final Step: Absorb overheads into cost units using

Question 10

When is allocation used in step 1

Answer 10

Allocation is used when overheads can be traced directly

Question 11

When is apportionment used in stage 1

Answer 11

Apportionment is used when overheads need to be shared using fair bases

Question 12

How is stage 2 done

Answer 12

Stage 2 is done using the Step-Down Method or Simultaneous Equations Method

Question 13

Absorption Rate =

Answer 13

Absorption Rate = Overhead Costs / Activity Level

Question 14

What does absorption costing ensure

Answer 14

Absorption costing ensures that all production costs, fixed and variable, are included in product cost

Question 15

What is absorption costing crucial for

Answer 15

Absorption costing is crucial for pricing, budgeting, and inventory valuation

Question 16

Why are budgeted rates used

Answer 16

Budgeted rates are used for:
- Timely pricing decisions
- Avoid seasonal or operational fluctuations

Question 17

Budgeted Rate

Answer 17

Budgeted Rate = Budgeted Overhead / Budgeted Activity

Question 18

When does under/over absorption occur

Answer 18

Under/over absorption occurs when actual activity differs from budgeted

Question 19

How does under-absorption occur

Answer 19

Under-absorption occurs when actual overheads > allocated overheads

Question 20

How does over-absorption occur

Answer 20

Over-absorption occurs when actual overheads < allocated overheads

Question 21

What are the adjustment methods needed for under/over-absorption

Answer 21

Adjustment methods for under/over-absorption are:
- Write off to profit/loss account
- Prorate the cost of goods sold, WIP, and inventory

Question 22

What costs are included in absorption costing

Answer 22

All manufacturing costs are included in the product cost

Question 23

What is absorption costing required for

Answer 23

Absorption costing is required for financial reporting under GAAP/IFRS

Question 24

What costs are included with marginal costing

Answer 24

Only variable costs are included in product costs

Question 25

How are fixed overheads treated with marginal costing

Answer 25

Fixed overheads are treated as period costs

Question 26

What does marginal costing focus on

Answer 26

Marginal costing focuses on contribution margin

Question 27

Contribution =

Answer 27

Contribution = Sales - Variable costs

Question 28

What does product cost include with absorption costing

Answer 28

Fixed & variable production costs

Question 29

What does product cost include with marginal costing

Answer 29

Variable production costs only

Question 30

What is the fixed overhead impact on absorption costing

Answer 30

Deferred in inventory until sale

Question 31

What is the fixed overhead impact on marginal costing

Answer 31

Expensed in full

Question 32

What does absorption costing do to inventory valuation

Answer 32

Inventory valuation is higher with absorption costing

Question 33

What is inventory valuation like with marginal costing

Answer 33

Inventory valuation is lower with marginal costing

Question 34

Is profit sensitive to stock levels with absorption costing

Answer 34

Profit is sensitive to stock levels with absorption costing

Question 35

Is profit sensitive to stock levels with marginal costing

Answer 35

Profit is not sensitive to stock levels with marginal costing

Question 36

Is marginal or absorption costing more useful in decision-making

Answer 36

Marginal costing is more useful in decision making

Question 37

What profit is higher when inventory increases: Absorption or marginal

Answer 37

When inventory increases, absorption costing profit is higher, as more fixed costs are deferred

Question 38

What costing methods profit is higher when inventory decreases

Answer 38

When inventory decreases, marginal costing profit is higher, as fewer costs are deferred

Question 39

What are profits like between the costing methods when inventory remains constant

Answer 39

When inventory remains constant, profits are equal

Question 40

What are the arguments for absorption costing

Answer 40

Arguments for absorption costing are: - Complies with external reporting standards - Treats all production costs as part of product value - Reduces profit volatility

Question 41

What are the limitations of absorption costing

Answer 41

Limitations of absorption costing are: - May encourage overproduction - Less relevant for short-term decision-making

Question 42

What are the arguments for marginal costing

Answer 42

Arguments for marginal costing are: - Provides clear decision-relevant information - Avoids profit manipulation through inventory changes - Supports CVP analysis, pricing, and operational planning

Question 43

What are the limitations of marginal costing

Answer 43

Limitations of marginal costing are: - Not accepted for external financial statements - Ignores that fixed costs may be product-related in long-run