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Management accounting techniques > Overheads and expenses > Flashcards

Overheads and expenses Flashcards

1
Q

What type of costs are direct costs and indirect costs ? P115

A
  • Direct costs - product costs - each unit of output
  • Indirect costs - period costs - not with each unit of output
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2
Q

What is the relationship between overheads annd costs units ? P115

A
  • No relation = particular unit of output
  • Shared amoungst - all costs units to which they relate
  • e.g. costs of factory rent within costs of output
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3
Q

What is imporant to remember about accounting for overheads for profit ? P115

A
  • overheads + direct costs must be included -covered by revenue from output
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4
Q

How do businesses begin to workout how to recover their overheads ? P115

A
  • Budget overhead - advance on annual basis
  • how to recover through output - use of overhead absorption rate
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5
Q

How are overheads usually classified in larger businesses , and what are the types of classifications ?P115

A

Function
Factory or production
Selling and distribution
Administration
finance

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6
Q

What are each functions or sections of the busienss likely to be known as ? P115

A
  • Cost centre
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7
Q

What other types of centres in business, apart from costs centres ? P116

A

profit centres
investment centres
revenue centres

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8
Q

What are the four types of centres collectively known as ? P116

A
  • Responsibility centres
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9
Q

What do we need to know about the business when dealing with overheads ? P116

A
  • Responsibility centres
  • depends on size of business and organisation of work
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10
Q

How are overheads collected into respnsbility centres ? P116

A

*type of costs
* Allocated
* apportioned

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11
Q

What is the purpose of allocating overheads ? P116

A

allocated to centre they belong to

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12
Q

What examples of allocations of overheads ? P116

A
  • Wage of a supervisor - one centre
  • rent of building - in which one centre
  • indirect materials - to one centre
    Allocation - centre to which belongs
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13
Q

What is th definition of allocation of overheads ? P116

A
  • Charging - a particular responsbility centre- overhead entirely incurred
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14
Q

What is apportionment of overheads ? P116

A
  • Sharing of overheads - number of responsibility centres to which they relate
  • charged proportionally
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15
Q

What must be found to appportion costs between centres? P117

A
  • Suitable basis or method must be found to apportion
  • basis related to type of costs
  • different methods = each type of overhead
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16
Q

What is a basis of apportionment for rent, rates ? P117

A

floor space

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17
Q

What is a basis of apportionment for heating, lighting P117

A

Floor space

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18
Q

What is the baiss of apportionment for building insurance ? P117

A

Floor space

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19
Q

What is the basis of approportionment for buildings depreciation? P117

A

Floor space

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20
Q

What is the basis of apportionment for machinery insurance ? P117

A

Costs/ Carrying amount of machinery

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21
Q

What si the basis of apportionment for the canteen ? P117

A

Number of employees

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22
Q

What is the basis of apportionment for supervisory costs ? P117

A
  • Number of employees- each centee
  • Supervisor labour hours worked
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23
Q

Why should allocation and approtionment of overheads be reviewed on a regular basis ? P117

A
  • Still valid check
  • E.g. Supervisor changing from 1 departments to 2
  • building work - expanding floor space - apportionment basis reworked
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24
Q

What type of responsibility centre are departments that solely provide service within a business ? P121

A
  • Cost centre
  • overheads is charged
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25
Q

How are the costs of service departments dealt with ? P121

A
  • No cost units charged
  • costs of service re-apportioned - to production departments - cost units
26
Q

What must be used when re-apportioning overhead costs from service departments to production departments ? P121

A

Suitable basesof re-apportionment

27
Q

What are example of re-apportioning service departments using a suitable basis ? P121

A
  • Maintenance department - value of machinery or equipment , time spent in production dep
  • Stores/ stationery deparment - values of goods
  • subsidised canteen - number of employees
28
Q

What are the two methods for re-apportioning the costs of service departments to other departments ?p121

A
  • Direct apportionmnt
  • step down method
29
Q

What is direct apportionement ? P121

A
  • Service deparment to production only
30
Q

What is the step down method ? P121

A
  • Service department to production and other service departments
31
Q

What order is taken with the step down method ? P122

A
  • First - re-apportion overheads of service department (provides service to other departments; does not receive any other service)
  • Second - re-apportion - service department (receives service from the other service department)
32
Q

What must then happen once overheads have been allocated and apportioned to production cost centres ? P127

A
  • Charged to cost units
  • managmenet accounting - absorption/ recovery
33
Q

Why must overheads be recovered ? P128

A
  • To be profitable
  • Selling price > direct costs and overheads
34
Q

What are the two steps that must be followed to recover the overheads of an apartment ? P128

A
  • Calculation of OAR
  • Application of this rate to actual work done
35
Q

What figures are the OAR calculated with ? P128

A

Estimated/ budgeted figures

36
Q

How is the OAR calculated ? P128

A

Total budgeted cost centre overheads / total planned work in the cost centre

37
Q

How must the amount of work within the OAR calculation be measured ? P128

A
  • Suitable way
  • e.g. Manufacturing business:
  • direct labour
  • machine hours
38
Q

What is the direct labour hour method of overhead absorption ? P129

A

*production overhead absorbed on basis:
* Number of direct labour hours worked
* production is labour intensive

39
Q

How is OAR calculated under direct laboour hours with the budgeted figures ? P129

A
  • Total costs centre overheads/ totall planned direct labour hours of cost centre = costs per direct labour hour = OAR
40
Q

How is the OAR applied to direct labour hours ? P129

A

Actual Direct labour hourds worked * OAR

41
Q

What if you are required to apply the OAR to the direct labour hours worked, in a department of more than one employee?

A
  • Direct labour hours * number of employees = total Direct labour hours
  • OAR * total direct labour hours
42
Q

What is the machine hour methos ? P129

A
  • Production overheads absorbed on basis:
  • Machine hours
  • Production is machine intensive
43
Q

How would you calculate OAR with machine hours using the budgeted figures ? P129

A
  • Total cost centre overheads / total planned machine hours in cost cnere = costs per machine hour
44
Q

How do you apply the OAR with machine hours ? P129

A

Machine hours worked * overhead absorption rate = overheads abssorbed

45
Q

What is the service sector– hourly rate (or sale price/ unit method) ?P130

A
  • e.g. accountants , solicitors
  • Overheads Absorbed - chargeable time / sales prices/ units sold
46
Q

How is OAR calculaed using chargeable time ( budgeted figures) ? P130

A

Total planned cost centre overheads/ total planned chargeable hours of cost centre = costs per hour of chargeable time in costs centre

47
Q

How do you apply the OAR using chargeable time ? P130

A

Chargeable hours ( sales price/units sold) * overhead absorption rate = overhead absorbed

48
Q

What is the service sector - miles travelled method of overhead absorption ? P131

A

Absorbed - miles travelled

49
Q

How do you calculate the overhead absorption rate for miles travelled using budgeted figures ?P131

A

Total cost centre planned overheads / total planned miles travelled in cost centre = costs per miles travelled

50
Q

How do you apply the OAR using the miles travelled method ? P131

A

Miles travelled * overhead absorption rate = overhead absorbed

51
Q

How would you select a method of overhead absorption ? P131

A

One OAR per department = reason cost incurred
e.g. Machine based costs centre
: overheads incurred related to machinery
: machine hour basis

52
Q

Why is it imprtnat to select the best method forf overhead absorption annd what must be done with ovehead methods regularly ? P132

A
  • Wrong decision - basis of costing information
  • check still valid
53
Q

Why are pre-determined rates within overheads used ? P132

A

estimates
Avoids calculating rate regularly - changes in short amount of time
smoothed- fluctuations of activity and costs - over longer accounting periods

54
Q

What are over and under ovehread absorptions ? P132

A
  • Difference - total amount of overhead absorbed (recovered) : total amount spent on overheads
55
Q

Why can over-absorbed overhead absorption be deterimental to profit ? P133

A
  • Seemingly - ‘bonus’, profit set higher
  • overhead rates set too high = sales lost = selling price too high
56
Q

Why is under-absorption of overheads deterimental to profit ? P133

A

costs to business - reduce profit

57
Q

Why could an overhead be under-absorbed ? P133

A
  • Output Selling price too low
  • output less than expected
  • actual overhead more than expected
58
Q

What are the bookkeeping entries for overheads account used for ? P134

A
  • Transfer- costs of overheads to productionn
  • credit over-absorbed overheads - statement of P/L
  • debit under-absorbed overheads - statement of P/L
59
Q

What is the double entry for transferring production overheads ( amount absorbed) to production ? P134

A
  • Debit: production
  • Credit: production overheads
60
Q

What is the double entry for crediting over-absorbed ? P134

A
  • Debit : production overheads
  • Credit: statement of P/L
  • Reduces total costs - production
  • Increases profits
61
Q

wnb

What is the double entry for under-absorbed overheads to the statement of profit/loss ? P134

A
  • Debit - statement of P/L
  • Credit - production overheads
  • Adds to total costs of productions
  • Reduces profits

Management accounting techniques (9 decks)

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