Overheads- AFM BY TAHA POPATIA

INTRODUCTION TO OVERHEADS

 Any cost incurred which cannot be directly traced to a product

 Production overheads = sum of all indirect costs = indirect material + indirect labour + indirect
expenses
 There are non-production overheads as well
 The treatment of overheads in marginal and absorption costing is different. Both of these
systems will be discussed in a later chapter
 Under absorption costing system we compute overheads absorption rate

OVERHEADS ALLOCATION

 Term used when whole cost items are charged direct to a cost unit or cost centre
 Example – Indirect labour

OVERHEADS APPORTIONMENT

 Term used when indirect costs are spread fairly between cost centres
 Example – Rent

OVERHEADS REAPPORTIONMENT

 Term used when service centre cost are apportioned to production centres
 There are three methods for reapportionment
o Direct method – where service centre cost are apportioned to production centres only
o Step-down method – where service centre cost are apportioned not only to production
centres but also to service centres that make use of their services
o Repeated distribution method – Where the service departments provide service to each
other

Over/under applied

 Calculated in absorption costing system only

 Steps
o Overheads absorption rate = Budgeted overheads / Budgeted basis (units)
o Applied or Absorbed = OAR x Actual basis (units)
o Comparison of absorbed and actual amounts

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