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Accounting for Overhead | Brief Questions | Descriptive Questions | Analytical Questions<\/span><\/b><\/p>\n \u00a0<\/span>Accounting for overhead exercise problems and answers includes Brief Questions, Descriptive Questions and Analytical Questions <\/span><\/p>\n \u00a0<\/span>\u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n All expenses other than direct expenses and production are overhead. <\/span><\/p>\n It is an aggregate of all indirect materials, indirect wages and indirect expenses. <\/span><\/p>\n Another name for overhead are on cost, burden cost, indirect expenses, non-productive cost, supplementary cost, logistic support cost and loading cost etc.<\/span><\/p>\n \u00a0<\/span><\/p>\n Definition of overhead <\/span><\/b><\/p>\n According to Institute of Cost and Management Account (ICMA, London),<\/span><\/i><\/b> <\/i>\u201cOverhead is an aggregate of indirect materials, indirect wages and indirect expenses<\/span><\/i>.<\/span>\u201d <\/span><\/i><\/p>\n \u00a0<\/span><\/p>\n Overheads represent fixed costs and relate to general business functions.<\/span><\/p>\n These costs still remain if production is shut down for a short period of time.<\/span><\/p>\n Some major overheads are:<\/span><\/p>\n Administrative overhead<\/span><\/p>\n General business overhead<\/span><\/p>\n Research overhead<\/span><\/p>\n Transportation overhead<\/span><\/p>\n Manufacturing overhead<\/span><\/p>\n Marketing overhead\u00a0 <\/span><\/p>\n Selling and promotional overhead etc.\u00a0 <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n According to given data of the overhead, some overhead are distributed directly, some in ratio, some in percentage, some in based on other overhead etc. <\/span><\/p>\n Generally, there are three methods to apportionment of overhead:<\/span><\/p>\n Direct distribution method<\/span><\/b> <\/b><\/b><\/p>\n Under this method, the costs of service department are distributed or apportioned to production department. <\/span><\/p>\n Overcharge and under charge is ignored. <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Step method <\/span><\/b><\/p>\n Under this method, the costs of service department are distributed or apportioned production department step by step or one by one. <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Reciprocal method<\/span><\/b><\/p>\n When overhead of one service department distributed to other service department; then distributed to production department, it is known reciprocal method. <\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Absorption means charging or sharing overhead to different cost units. <\/span><\/p>\n In other words, charging or sharing overhead to specific product or individual units is known absorption. <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Definition\u00a0 <\/span><\/b><\/p>\n According to ICMA,<\/span><\/i><\/b> <\/i>\u201cThe allotment of overhead to cost unit is known as overhead absorption.\u201d <\/b><\/span><\/i><\/p>\n \u00a0<\/span><\/b><\/p>\n Methods of absorption<\/span><\/b><\/p>\n There are different methods of absorption of overhead; they are:<\/span><\/p>\n Production unit method | Cost per unit of output<\/span><\/b><\/p>\n Under this method, overhead absorption rate is calculated by dividing the overhead cost by number of units prod<\/span><\/strong>uced or expected to be produced.<\/span><\/strong><\/p>\n = Actual overhead \u00f7 No. of units produced <\/span><\/p>\n Or <\/span><\/p>\n = Budgeted overhead \u00f7 No. of units budgeted<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Percentage of direct materials cost<\/span><\/b><\/p>\n Under this method, overhead is absorbed based on the actual or predetermined absorption rate.<\/span><\/p>\n It is calculated by expressing the overhead cost as percentage of direct materials for the same period.<\/span><\/p>\n = (Actual overhead \u00f7 Actual direct materials cost) \u00d7 100<\/span><\/p>\n Or <\/span><\/p>\n = (Budgeted overhead \u00f7 Budgeted direct materials cost) \u00d7 100<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Percentage of direct labour cost<\/span><\/b><\/p>\n Under this method, overhead absorption rate is calculated by expressing the overhead expense to be absorbed as a percentage of cost of direct labour for the same period<\/span><\/strong>.<\/span><\/strong><\/p>\n = (Actual overhead \u00f7 Actual direct labour cost) \u00d7 100<\/span><\/p>\n Or <\/span><\/p>\n = (Budgeted overhead \u00f7 Budgeted direct labour cost) \u00d7 100<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Percentage of prime cost<\/span><\/b><\/p>\n This method is a combination of both direct material cost and direct labour cost method. <\/span><\/p>\n The overhead absorption is calculated as follows:<\/span><\/p>\n = (Actual overhead \u00f7 Budgeted prime cost) \u00d7 100<\/span><\/p>\n Or <\/span><\/p>\n = (Budgeted overhead \u00f7 Budgeted prime cost) \u00d7 100<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Labour hour rate<\/span><\/b><\/p>\n Where manpower is used, labour hour rate is applied in absorption of overheads. <\/span><\/p>\n The budgeted overhead cost to be absorbed is divided by the budgeted labour hours.<\/span><\/p>\n = Actual overhead \u00f7 Actual labour hours during the period<\/span><\/p>\n Or <\/span><\/p>\n = Budgeted overhead \u00f7 Budgeted labour hours during the period<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Machine hour rate <\/span><\/b><\/p>\n Where automatic and semi-automatic machinery is used, machine hour rate is applied in absorption of overheads. <\/span><\/p>\n This is the most scientific method of absorption of factory overheads.<\/span><\/p>\n The budgeted overhead cost to be absorbed is divided by the budgeted machine hours.<\/span><\/p>\n = Actual overhead \u00f7 Actual machine hours during the period<\/span><\/p>\n Or <\/span><\/p>\n = Budgeted overhead \u00f7 Budgeted machine hours during the period<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n BQ: 1<\/span><\/b><\/p>\n The following extracted information is given by a manufacturing company:<\/span><\/p>\n1. Concept of Overhead <\/span><\/b><\/b><\/h3>\n
2. Apportionment of Overhead | Allocation of Overhead<\/span><\/b><\/h3>\n
3. Absorption of Overhead<\/span><\/b><\/h3>\n
Brief Questions | Accounting for Overhead <\/span><\/b><\/h3>\n
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