Overheads Flashcards
(37 cards)
Types of manufacturing expenses?
1.Direct Expenses
2.Indirect Expenses
what are direct expenses?
expenses that are fully traceable to the product, service or department that is being costed or in other words, the expenses which can be attributable directly to specific cost object.
Examples:
Raw Materials that are specifically used for the product in consideration.
Labour which is directly involved in converting the raw material.
Other expenses that are specifically incurred for the product
What are indirect expenses?
are those expenses that incur in the course of making a product, providing of service or running department but which cannot be traced directly and fully to the product, service or department
Examples:
Labour which is not directly involved in the conversion of raw material but indirectly involved in making of the product.
Tools, spares and materials that are used in the machinery or equipment used in the production,
Factory rent if the factory premises are hired,
Depreciation of machinery and equipment.
Electricity and other utility expenses incurred for the production facilities
manufacturing expenses comprise of?
The manufacturing expenses generally comprise:
a) Direct materials,
b) Direct labours and
c) Production / manufacturing / factory overheads.
what is Prime Cost?
Dir Material cost + Dir Labour cost are called ‘Prime Costs’
What is conversion cost?
In direct Labour cost+ Overhead cost
Cost Behaviour?
Cost behaviors describe how costs change in response to changes in activity levels.
Understanding cost behaviors helps in analyzing cost structures and making informed business decisions.
Types of cost behavior?
Costs are categorized as either variable or fixed.
Variable cost?
Variable costs change proportionally with the level of activity
Variable expenses are fixed per unit but vary in total.
Fixed Cost?
Fixed costs remain constant regardless of the level of activity.
Fixed expenses vary per unit but are fixed in total.
Semi Variable Cost?
Some costs are semi-variable, combining fixed and variable components.
Step Fixed Cost?
Step fixed costs remain constant until a certain activity level is reached, after which they change.
Diff between Step fixed cost and semi-variable cost.
Step Fixed Costs
1. Remain constant within a specific activity range
2. Change abruptly when activity threshold is crossed
3.Not directly proportional to the level of activity
Examples: supervisor salaries based on labor hours/production levels
Semi-Variable Costs
1.Have both fixed and variable components
2.Fixed portion remains constant
3.Variable portion changes with activity level
Examples: utility bills, telephone bills
what are production overheads?
Overheads related to production processes (manufacturing/factory overheads)
Examples: Salary of factory supervisor, depreciation of production machine, electricity cost, rent of factory premises
Can be fixed (e.g., rent of factory premises) or variable (e.g., electricity consumption)
what are non-production overheads?
Overheads supporting overall business objectives
Examples: Salaries of sales, finance, HR, and IT teams, rent of building for non-production departments, depreciation of computers in non-production departments
Classified as administrative expenses, marketing, selling, and distribution expenses
Administrative Expenses
Costs associated with general management of the organization
Examples: Fire extinguishing system implementation, overall security of business premises, accounting, finance, HR, and IT functions
Mostly fixed expenses charged to the profit and loss account
Marketing, Selling, and Distribution Expenses
Expenses related to selling inventory to customers
Examples: Advertising, marketing strategies, customer information gathering, product distribution, after-sales services
Can be both fixed (e.g., salaries, cost of advertisement) and variable (e.g., sales commission, delivery charges
Product Costs vs. Period Costs
Product costs are incurred to acquire or make goods for eventual sale (recognized as expenses when sale occurs)
Period costs are all other costs that are not part of the cost of goods
Period costs are expensed in the period incurred, not included in the cost of goods
Note: Administrative and marketing, selling, and distribution expenses are not part of the cost of the product but may be considered for internal reporting purposes, such as determining the contribution margin.
Why we need to allocate indirect cost?
When more than one product is being produced using the same facilities, then they are allocated cost on individual basis. The costs that are directly attributable to the product can be easily allocated to that product. However, costs that are incurred in accumulation for all the products, need to be allocated on systematic basis. These are known as absorption of indirect cost
How to absorb indirect production cost to product cost?
In order to absorb indirect production related cost to product cost, following steps should be followed:
1. Allocation
2.Apportionment
3.Re-apportionment
What is allocation?
It is the process of allocating the individual cost element to specific cost center
What is apportionment?
It is the process of allocating the common cost to more than one cost centers on fair basis.
What is re-apportionment?
It is the process of apportioning the service department costs to production departments based on service provided by service cost centers to production cost centers. There are three different methods in dealing re-apportionment.
1.When service departments only provided services to production departments,then direct allocation method is used.
2.When one service department provides services to production departments along with other service department but with no reciprocity, then step down method is used.
3.Sometimes, each service department provides services to each other including production departments, then we use the reciprocal method.
4.Absorption Rate
What is direct method of re apportionment?
In this method, no service department cost is transferred to other service department/s, rather it is apportioned to production departments only.
