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DIRECT EXPENSES & OVERHEAD

Intro: Expenses can be classified as direct and indirect expenses.


 Direct Expenses: are defined as “costs other than material or wages, which are
incurred for a specific product/production process or providing of services”.
 Indirect Expenses: are those expenses which cannot be directly allocated to a
specific cost & service. For example: rent, rates, insurance of factory etc.
 Overhead: is the aggregate of indirect material costs, indirect labour cost and
indirect expenses which cannot be conveniently identified with and directly
allocated to a particular cost centre or cost object in an economically feasible way.
It is also known as indirect cost.

The whole discussion is divided into 2 parts, Here if the first part.

Q1. Freight inward is a direct expense.


(a) True
(b) False

NOTE: Freight inward is a direct expense, if the goods are handled by an outside carrier
whose charges may be related to individual units/group of Unit.

Q2. Which direct expense can be charged as a rate per unit?


(a) Hire charges of plant
(b) Royalties
(c) Freight
(d) Traveling expenses
NOTE:
 Hire charges of plant : is used for specific job
 Royalties is charged as a rate per unit
 Freight: handled by an outside carrier whose charges can be related to
individual units.
 Traveling expenses: incurred on a particular contract.

Q3. Which of the following are not indirect expenses?


(a) Rent
(b) Insurance
(c) Salesman commission
(d) Advertisement
NOTE:
 Rent and Insurance is not directly related to specific job
 Advertisement can not conveniently allocated to cost center or cost unit
 Salesman Commission is based on the value of particular units sold

Q4. In modern industrial undertakings, overheads include various kinds of direct costs.
(a) True
(b) False

NOTE: Overhead is the aggregate of indirect material costs, indirect labour cost and
indirect expenses which cannot be conveniently identified with and directly allocated to a
particular cost centre or cost object in an economically feasible way. It is also known as
indirect cost. For example: rent, rates, insurance of factory, etc.

Q5. Which of the following shows the correct number of bases of overheads
classification?
(a) Two
(b) Three
(c) Four
(d) Five

NOTE: Overheads are classified into 3 types which include function-wise classification,
behavior – wise classification and element –wise classification.
 Functional-wise classification: Production overhead, administrative
overhead, selling overhead, distribution overhead.
 Behavior- wise classification: Fixed overhead, variable overhead, semi-
variable overhead
 Element-wise classification: Indirect materials, indirect labour, indirect
expenses.

Q6. In the modern Industrial undertakings, manufacturing overheads include all direct
costs incurred in the running of manufacturing division of the factory.
(a) True
(b) False

NOTE: Manufacturing overheads include all indirect costs i.e. indirect materials, indirect
labour and indirect expenses incurred in manufacturing and production department.

Q7. The classification of overheads expenditure depends upon the nature of the product
or service.
(a) True
(b) False

NOTE: Classification of overheads is the process of grouping the various items of


overheads into distinct class /group on the basis of some common characteristics. So
the classification of overheads expenditure depends upon the type and size of a business
and the nature of the product or the service rendered.

Q8. Which of the following is a behavioral overhead?


(a) Fixed Overheads
(b) Indirect Expenses
(c) Distribution Overheads
(d) Administrative Overheads

NOTE: Based on the behavior patterns, overhead are classified into fixed overheads,
variable overheads and semi-variable overheads.

Q9. In large factories, standing order numbers help in grouping smaller and similar
indirect expenses.
(a) True
(b) False

NOTE: Standing order number system is the system under which a number is allotted to
each item of expense for the purpose of identification. So in the large factories it becomes
easy to classify the indirect expenditure in the groups.
The following are the methods used to allot the identification code under standing order
number system:
(1) Numerical coding: Under this system, a fixed number is allotted
(2) Mnemonic method: This system uses alphabets and letters to help the memory.
For example: AD as Administration
(3) Decimal method: Under this system, a whole number like 1.1 or 3.2.1 is allotted
for the head of the expenditure or master group while the decimals are allotted to
the primary or secondary items.
(4) Field method: Under this method, codes are used as numeric in nature and each
code number is consists of nine digits. For example: in code 20 130 02 06
whereas 20 stands for variable costs, 130 stands for idle time etc.
(5) Combination of symbol and numbers: Under this method, a combination of
symbol alphabet and a number is used as code. For example: M1 stands for
Maintenance of building.

Q10. The cost of indirect materials purchased in a month from which of the following
account?
(a) Wages account
(b) Cost ledger control account
(c) Stores ledger control account
(d) Factory overhead control account

NOTE: At the end of each month, the total of indirect materials is charged or debited
from factory overhead control account and credited to stores ledger control account.

Q11. At the end of the month, the total of indirect expenses is credited to which of the
following account?
(a) Wages account
(b) Cost ledger control account
(c) Stores ledger control account
(d) Factory overhead control account

NOTE: At the end of the period, the total of factory overheads of indirect expenses
would be debited to factory overhead control account and credited to the cost ledger
control account.

Q12. The location of various departments is fixed as per the sequence of operation.
(a) True
(b) False

NOTE: A factory is divided into parts or sub-division. These sub-divisions are done in
such a manner so that every department represents a division of activity of the
organization. For example: Repairs department, power house department, tools
department etc.So the sequence of operations is taken into consideration while
determining the location of various departments.

Q13. In how many broad categories are the departments of a factory divided?
(a) 2
(b) 3
(c) 4
(d) 5

NOTE: The departments in a factory can be broadly categorized into 3 types namely:
producing or manufacturing departments, service departments and partly producing
departments.
 Manufacturing Department: is depends upon the nature of the industry,
type of the work performed & the size of the factory.
 Service Department: is not directly engaged in production but render a
special service for the benefit of other departments
 Partly production department: is dealing with both manufacturing and
service department.

Q14. How many primary bases are there for apportioning the items of overhead
expenses?
(a) Seven
(b) Eight
(c) Nine
(d) Ten

NOTE: Apportionment means the distribution of overhead among department equally.


The following are the basis for apportioning the items of overhead expenses:
(1) Floor rate : Rent, rates
(2) No. of the employees or wages of each department: Group insurance, canteen
expenses, general welfare expenses
(3) Capital Values: Insurance and depreciation of plant or machinery
(4) Direct Labour hours: Work managers remuneration, overtime rate etc
(5) No. of light points: Electric light
(6) Horse power of machines or machine hours: Electric power
(7) Audit Fee
(8) Value or weight of direct material: Stores overhead
(9) Weight, volume, tonne, mile: Delivery expenses

Q15. How many criteria for the secondary distribution of overheads are there for
apportioning the items of overheads expenses?
(a) Four
(b) Five
(c) Six
(d) Seven

NOTE:
 Service or used method: where overheads are distributed as per the basis
of service rendered.
 Analysis or survey method: is the method where overhead are apportioned
to measure the benefit received from each department.
 Ability to pay
 Efficiency or incentive method: is the method where overhead
apportionment is done as per the production target.

Q16. Under direct distribution method of re-distribution of service department costs to


production departments, services from one service department to another department are
not considered.
(a) True
(b) False

SELF EXPLANATORY

Q17. Which of the following methods are used for dealing with inter-services department
transfer?
(a) Simultaneous equations methods
(b) Repeated distribution method
(c) Concentric circled method
(d) Linear equations method

NOTE: When there is 2 or more service department and the services are rendered to each
other department. This is called Inter-service department transfer. There are 3 methods
for dealing, they are as follows:
 Simultaneous equation method: where cost of service department is
ascertained and then distributed among the production department.
 Repeated distribution method: Under this method, costs are apportioned
over and over other department such as production as well as service
department until the costs is exhausted.
 Trial & Error method: where is the cost of one service department is
apportioned to other service department.

Q18. Pre-determined overhead rate is an ideal method for the calculation of the rate in the
situation of cost estimating and competitive pricing.
(a) True
(b) False

NOTE: Pre-determined overhead rate = Budget overhead for the period/ budget base for
the period

Q19. There is one common overhead rate used for the whole factory in blanket overhead
rate method.
(a) True
(b) False

NOTE: Blanket overhead rate method is used only on those factories where only one
major product is produced or several products but passes through the entire department
and takes equal time in the entire department.
Blanket overhead rate = Overhead cost for the entire factory/ base for the period

Q17. Which of the following is used as a base in method of percentage of direct material
cost for the absorption of factory overheads?
(a) The cost of direct materials used in the manufacture of a product
(b) The cost of indirect materials used in the manufacture of a product
(c) The cost of direct and indirect materials
(d) The cost of direct and indirect materials and direct

SELF EXPLAINATORY