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    Chapter 4 Overhead

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    MUHAMMAD ZAIM HAMZI MUHAMMAD ZIN
    Overhead costs are indirect costs that cannot be directly traced to a specific product or service. There are different types of overhead costs like production, selling, distribution, and administration overhead. Overhead costs need to be allocated or apportioned to different cost centers using appropriate bases. Service cost centers' overhead is reapportioned to production cost centers. An overhead absorption rate is used to absorb overhead into product costs. Absorbed overhead is compared to actual overhead to determine if there is over or under absorption.

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    Chapter 4 Overhead

    Uploaded by

    MUHAMMAD ZAIM HAMZI MUHAMMAD ZIN
    10 views21 pages
    Overhead costs are indirect costs that cannot be directly traced to a specific product or service. There are different types of overhead costs like production, selling, distribution, and administration overhead. Overhead costs need to be allocated or apportioned to different cost centers using appropriate bases. Service cost centers' overhead is reapportioned to production cost centers. An overhead absorption rate is used to absorb overhead into product costs. Absorbed overhead is compared to actual overhead to determine if there is over or under absorption.

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    Overhead costs are indirect costs that cannot be directly traced to a specific product or service. There are different types of overhead costs like production, selling, distribution, and administration overhead. Overhead costs need to be allocated or apportioned to different cost centers using appropriate bases. Service cost centers' overhead is reapportioned to production cost centers. An overhead absorption rate is used to absorb overhead into product costs. Absorbed overhead is compared to actual overhead to determine if there is over or under absorption.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    10 views21 pages

    Chapter 4 Overhead

    Uploaded by

    MUHAMMAD ZAIM HAMZI MUHAMMAD ZIN
    Overhead costs are indirect costs that cannot be directly traced to a specific product or service. There are different types of overhead costs like production, selling, distribution, and administration overhead. Overhead costs need to be allocated or apportioned to different cost centers using appropriate bases. Service cost centers' overhead is reapportioned to production cost centers. An overhead absorption rate is used to absorb overhead into product costs. Absorbed overhead is compared to actual overhead to determine if there is over or under absorption.

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    © All Rights Reserved
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    of 21

    CHAPTER

    FOUR

    OVERHEAD
    Learning Outcomes
     At
    the end of this topic, students should be
    able to :
     Define & classify overhead cost
     Allocate & apportion overhead costs to different cost
    centers.
     Reapportion overhead costs of service cost center to
    production cost center.
     Calculate absorption of overhead into product costs.
     Calculate over or under absorption of overhead.
    Recap-Cost Classification!!
    NATURE IDENTIFIABILIY
    MATERIALS = DIRECT MATERIALS + INDIRECT
    MATERIALS
    + + +

    LABOUR = DIRECT LABOUR + INDIRECT LABOUR


    + + +

    EXPENSES = DIRECT EXPENSES + INDIRECT EXPENSES


    = = =

    TOTAL COST = PRIME COST + OVERHEAD


    (DIRECT COST) (INDIRECT COST)
    DEFINITION OF OVERHEAD COST
     Alsocalled as indirect cost.
     Refer to cost that cannot be allocated or indirectly
    traceable to a particular product.

    Overhead

    Indirect Indirect Indirect


    Material Wages Expenses

    Paint in Cleaner, Rental &


    making security electricity
    furniture guard salary cost
    CLASSIFICATION OF OVERHEADS
    2.
    1. Production 3. Selling 4. Distribution
    Administration
    Overhead Overhead Overhead
    Overhead

    Cost Cost Cost


    incurred in Cost incurred in incurred for incurred to
    product- the the purpose deliver
    making administration of selling product to
    activities of the business goods customers.

    E.g.: Indirect E.g.: E.g.:


    Stationery E.g.: Travelling
    material, Advertisement
    expenses, expenses
    factory rental cost
    Clerk salary
    There are 2 cost
    centres involved in
    assigning the
    COST CENTERS overhead costs

    1. Production 2. Service Cost


    Cost Center Center

    • A department • A department that


    where production provides
    activities take services/support
    place production activities
    • E.g.: Painting, • E.g.: Cleaning,
    Machining, Maintenance,
    Assembly Inspection
    COST ALLOTMENT
     Overhead cannot be charged direct to cost centers,
    thus it must be shared equitably between the cost
    center.
     Cost Allotment refers to distribution of overhead to
    each cost center.
     Overhead can be distributed using 2 methods:
    1. Cost allocation(Distributing the overhead)
    2. Cost apportionment ( sharing out the overhead)
    Cost Allocation vs Cost apportionment
    Cost Allocation Cost Apportionment
    When? -When overhead cost are When the overhead costs
    given specific & direct to are given for the whole cost
    a particular cost centre. centers.
    Direct or Overhead cost can be Overhead cost cannot be
    indirect? allocated directly to cost allocated directly must be
    center. apportioned based on a
    suitable basis.

    *Suitable basis: the


    appropriate basis of the
    activities of the overhead.
    Example Salary of the manager of -Electricity cost
    the packing department -Rental of building
    Suitable Basis of Apportionment
    OVERHEAD COST BASIS OF APPORTIONMENT
    Rental, heating & lighting, Area or space occupied
    electricity
    Supervision, cafeteria & No of employees, direct
    canteen expenses wages, direct labour hours
    Depreciation &Insurance The value of assets: cost / net
    book value
    Power consumption Horse Power / Kilowatt hours
    Materials handling/ store No of material requisitions
    Maintenance expenses Maintenance hours
    COST REAPPORTIONMENT
     All overhead cost incurred by the service cost center is
    reapportion to production cost center using suitable
    basis.

     Reason: cost incurred by service cost center should be


    borne by the production cost center because the
    function of service cost center is to support production
    cost center.

     2 methods of reapportionment:
    1. Direct Method – When there is only 1 service cost
    center
    2. Repeated Method (reciprocal) – When there is >
    1service cost center
    Remember!!!

    Overhead cost

    Production cost Service Cost


    center Center

    Reapportion to
    Absorbed all OH
    production cost
    cost incurred by
    center until become
    service cost center
    zero/insignificant
    Basis of Reapportionment
    SERVICE CENTRE COMMONLY USED BASIS FOR
    REAPPORTIONMENT
    Maintenance Maintenance Labour Hour
    Maintenance Wages
    Plant Values
    Machine Hours
    Stores No. of Material Requisition Notes
    Weight of Material Issued
    Personnel No. of Employees
    Labour Hours
    Power Generation Meter Usage / Kwh
    Cafeteria/ No. of Employees
    Canteen
    Overhead Absorption Rate (OAR)

     OAR is a pre-determined rate (estimation rate)


    use to know how much overhead has been
    absorbed during the year.

    OAR = Total Budgeted Production Overhead


    Budgeted Basis
    Why pre-determined rate is
    used in computing overhead?
     The actual costs are not known until the
    end of costing period.
     The use of pre-determined rate enables
    product cost to be calculated as soon as
    production is completed.
    Overhead Absorption Rate (OAR)
    2 Type of OAR:

    1. Single/ Blanket • All department using one


    Overhead Rate single rate

    • Each department have its


    2. Departmental
    own overhead rate based
    Overhead Rate
    on its core activities.
    Basis of Overhead Absorption
    o Different department might have different basis to
    absorb overhead depends on nature of their activity.

    Direct
    Machine
    Materials Prime Cost
    Hour
    Cost

    Direct Direct
    Unit of
    Labour Labour
    Production
    Hour Cost
    Calculation of OAR
    OAR = Total Budgeted Production Overhead
    Budgeted Basis*

    *Absorption Formula Answer


    Basis
    Direct Material Total Budgeted Overhead / Total % of DM Cost
    Cost DM Cost

    Direct Labour Total Budgeted Overhead / Total DL % of DL Cost


    Cost Cost
    Direct Labour Total Budgeted Overhead / Total DL RM per DL Hour
    Hour Hour
    Machine Hour Total Budgeted Overhead / Total RM per
    Machine Hour Machine Hour
    Unit of Total Budgeted Overhead / Total RM per unit of
    Production unit of output output
    OVER OR UNDER ABSORPTION OF
    OVERHEAD
     Because OAR is based on estimation rate, there
    will be a difference between the overhead
    absorbed & actual overhead incurred at the
    end of costing period.

    Under Absorption Actual Overhead > Overhead


    Absorbed
    Over Absorption Overhead Absorbed > Actual
    Overhead

    Overhead Absorbed = OAR X Actual Basis


    OVERHEAD ANALYSIS SHEET
     Functions :
     To show the overhead charged to each cost center.
     Only indirect cost are recorded in the overhead
    analysis sheet.
     Steps to follow:
    1) Calculation of Total Overhead
    2) Calculation of Total Budgeted Production Overhead
    3) Calculation of OAR
    4) Calculation of Overhead Absorbed
    5) Calculation of Over / Under overhead absorption of
    overhead (compare overhead absorbed vs actual
    overhead)
    OVERHEAD COSTS

    Direct Apportionment
    Allocation

    Production Service Department


    department X Y
    A B
    Re apportionment service
    dept costs to production dept

    Absorption
    (OAR)

    PRODUCTS COST
    Past Year Questions
     Dec2019
     January2018
     March 2017

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