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 CHAPTER 5
Costing for Direct
Expenses and Overheads

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 Direct Expenses

 Definition
 Examples
 Nature of direct expenses
 Direct treated as indirect
 Invoice

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 Overheads

 Definition
 Types
− Production
− Administration
− Selling
− Distribution

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 Collection of Overheads

 Meter
 Plant register
 Invoice

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 Cost Centres or Department

 Production
 Service

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 Cost Allotment

 Cost allocation
 Cost apportionment
− Basis
 Cost reapportionment
− Direct basis
− Reciprocal basis
• Continuous
• Simultaneous

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 Overhead Absorption

Definition
Computation absorption rate
Methods
– Material cost percentage
– Labour cost percentage
– Direct labour hour rate
– Machine hour rate
– Cost unit rate
Predetermined absorption rates
– Purpose of calculating rate
– Based on estimates
– Formula
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 Overhead Absorption (cont.)

Over or under absorption

– Overhead incurred and overhead absorbed
– Treatment of over or under absorption
– Causes of over or under absorption

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 Non Production Overhead

 Administration
 Selling
 Distribution

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 Accounting for Overheads

 Overhead account
 Work in progress account
 Under or over absorption of overhead account
 Profit and loss account

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 Depreciation

 Definition
 Elements
 Methods
 Reporting

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 Activity Based Costing

 Definition
 Purpose
 Elements
− Activities
− Cost drivers
− Cost pools
− Cost objects
 Two stage procedure
 Compared with traditional costing
 Limitations

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