Accounting for Overhead ACCA F2 PRESENTATION.pptx

ACCA F2

1. Accounting for Overheads • explain the different treatment of direct and indirect expenses • describe the procedures involved in determining production overhead absorption rates • allocate and apportion production overheads to cost centres using an appropriate basis • reapportion service cost centre costs to production cost centres (using the reciprocal method where service cost centres work for each other) • select, apply and discuss appropriate bases for absorption rates • prepare journal and ledger entries for manufacturing overheads incurred and absorbed • calculate and explain the under- and over-absorption of overheads.

2. Direct expenses are expenses that can be directly identified with a specific cost unit or cost centre . • There are few examples of direct expenses but royalties paid to a designer or fees paid to a subcontractor for a specific job could be classed as direct expenses. • Direct expenses are part of the prime cost of a product. Indirect expenses cannot be directly identified with a specific cost unit or cost centre . • The cost of renting a factory is classified as an indirect cost as the rent could be covering the manufacturing location of all products and also possibly other areas of the business such as the accounting department, a non-production location. It is not possible to relate the rent to a single products or location. • Indirect expenses are part of the overheads of a business. Overheads = indirect materials + indirect labour + indirect expenses Examples of production cost centres include: Examples of production service cost centres include: Assembly Maintenance Machining Canteen Finishing. Stores.

3. Absorption costing involves the following stages: – allocation and apportionment of overheads to the different cost centres – reapportionment of service (non-production) cost centre overheads to the production cost centres – absorption of overheads into the products. The first stage of the absorption costing process involves the allocation and apportionment of overheads. • Allocation involves charging overheads directly to specific departments (production and service). • Overheads must be apportioned between different production and service departments on a fair basis.

4. Reapportionment of service cost centre costs to production cost centres • Direct method – the cost of each service cost centre is re-apportioned to the production cost centres only. • Step down method – used when one service department works or provides a service for other service departments as well as the production departments. • Reciprocal reapportionment (or the repeated distribution method) – used where service cost centres do work for each other as well as provide a service for the production cost centres .

5. – Direct reapportionment

6. Step down reapportionment

7. Reciprocal reapportionment Canteen overheads are reapportioned on the basis of number of employees that work in the departments it services. Total employees that eat in the canteen = 18 + 30 + 12 = 60 Reapportioned to Assembly department = 18/60 × $6,600 = $1,980) Assembly = 50% × $19,920 = $9,960

8. Absorption of overheads Overheads can also be absorbed into cost units using the following absorption bases: – units produced – machine-hour rate (when production is machine intensive) – labour -hour rate (when production is labour intensive) – percentage of prime cost – percentage of direct wages

9. Under- and over-absorption of overheads OAR=$80000/20000=$4 Overhead absorbed=$4*22000=$88000 Actual Overhead=$90000 Answer is under $2000 Actual Overhead > Overhead absorbed= under Actual Overhead < Overhead absorbed= over Overhead incurred (actual) 84,000 Overhead absorbed (45,000 * $2) 90,000 Over absorption of overhead 6,000

10. A business absorbs its fixed production overhead on the basis of direct labour hours. The budgeted direct labour hours for week 24 were 4,200. During that week 4,050 direct labour hours were worked and the production overhead incurred was $16,700. The overhead was under absorbed by $1,310. The budgeted fixed overhead for the week (to the nearest $10) was _________ Actual overhead $16,700 Under-absorbed $(1,310) Overhead absorbed $15,390 OAR=$15390/4050=$3.80 per hour Budgeted fixed overhead = 4,200 × $3.80 = $15,960 A business absorbs its fixed overheads on the basis of machine hours worked. The following figures are available for the month of June: Budgeted fixed overhead $45,000 Budgeted machine hours 30,000 Actual fixed overhead $49,000 If there was an over-absorption of overhead of $3,500, how many machine hours were worked in the month? OAR=$45000/30000=$1.5 per hour Actual overhead $49,000 Over-absorbed overhead $3,500 $52500/$1.50=35000 hours Absorbed overhead $52,500