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PA302 COST ACCOUNTING OVERHEAD. BY : PUAN WAN MAIMUNAH WAN ISHAK COMMERCE DEPART. POLISAS. WHAT IS OVERHEAD COST ? Any indirect cost Cost which is cannot be allocated directly to unit of production. Including indirect raw materials, indirect labour and indirect expenses.

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slide1
PA302 COST ACCOUNTING

OVERHEAD

BY : PUAN WAN MAIMUNAH WAN ISHAK

COMMERCE DEPART.

POLISAS

slide2
WHAT IS OVERHEAD COST ?

Any indirect cost

Cost which is cannot be allocated directly to unit of production.

Including indirect raw materials, indirect labour and indirect expenses.

allocation and apportionment of overhead
ALLOCATION AND APPORTIONMENT OF OVERHEAD

Departmentalization of overhead

Primary Distribution

Some overhead costs can be directly identified with a particular department or cost center and can be allocated specifically to the department.

However, there are some overhead costs that cannot be identified and charged directly to a department. The costs must be apportioned to any department using such items.

Cost apportionment is the process of charging expenses in an equitable proportion to the various cost center or department.

Further about apportionment…

  • means dividing the company into segments called cost centers to which expenses are incurred.

* Productions department

= represents a subunit of the company where manufacturing activity takes place.

* Service departments

=represent cost centers which provide support for the production department.

slide6
Example 7.1

The Elegant Company has four departments.A, B and C are the production departments and D is a servicingdepartment.

The actual costs for a period are as follows:

slide7
The following data are also available in respect of the four departments:

You are required to apportion the above costs to the various departments on the most equitable method.

do not fear of opposition and challenges remember a kite rise against the wind
Do not fear of opposition and challenges…remember a kite rise against the wind…

LETS CHECK OUT THE ANSWER….

TOTAL COST :

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Secondary DistributionThe overhead costs of service department should be further assigned to production Departments. WHY ?Service departments do not themselves manufacture anything. The reassignment or reapportionment of service departments overhead to production department is termed secondary distribution.
eg 1 secondary distribution
Eg.1 (secondary distribution) :
  • Assume the following data for A. Azim Industries:
  • The departmental distribution (primary distribution) summary has the following totals:

The expense of the service departments is charged out

on a percentage basis as following:

  • You are required to show the reapportionment of overhead using continuous method.
example 2
Example 2 :
  • Assume the following data for A. Azim Industries:
  •  The departmental distribution ( primary distribution ) summary has the following totals:
  • The expenses of the service departments is charged out on a percentage basis as follows:
  • You are required to show the reapportionment of overhead using direct method.
slide16
ABSORPTION OF OVERHEAD COSTS
  • After all service departments overhead costs have been apportioned to production departments, the next step is to spread factory overhead to different products or job produced.
  • This is termed as ‘overhead absorption’.
slide17
Methods of Absorption
  • Some method of overhead absorption has to be applied to absorb factory overhead to individual product or jobs on some equitable basis. The rate, which is used to charge overhead costs to the products job, is known as absorption rate. The following are the generally recognized methods of absorption rate

The activity level that should be used are base on items such as direct labour hours, direct labour costs, machine hours, direct material costs and unit of output.

example 1
Example 1:
  • The following data was collected for MM factory:

Production overheads RM10000

Direct labour hours 2000 hours

Direct labour costs RM8000

Machine hours 4000 hours

Direct materials costs RM5000

Production 2500 units

Calculate OAR using the following bases:

a. Direct labour hours;

b. Direct labour costs

c. Machine hours;

d. Direct material costs; and

e. Production output.

solution2
Solution :

a) OAR = Budgeted Overhead Budgeted Direct labour hours

= 10,000

2000 DLH

= RM5 per direct lab. hour.

b) OAR =Overhead

Direct labour costs

= 10000

8000

= 125% of direct labour costs

solution3
Solution :
  • c) OAR = Overhead

Machine hours

  = 10000

4000 machine hours

= RM2.50 per machine hour

  • d) OAR = Overhead

Direct material costs

= 10000

5000

= 200% of direct material costs

  • e) OAR = Overhead

Production output

= 10000

2500

= RM4 per unit

example 21
Example 2:
  • Turn to page 3 eg 8.3 ( your module)

Lets try out that example

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