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, semivariable 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) (4) (5) (6) (7) (8) (9)
Capital Values: Insurance and depreciation of plant or machinery Direct Labour hours: Work managers remuneration, overtime rate etc No. of light points: Electric light Horse power of machines or machine hours: Electric power Audit Fee Value or weight of direct material: Stores overhead 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