Cost Accounting Unit-4 Element of Cost : Overheads Important Question Answer [ Gauhati University Bcom 4th Sem]

 

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Unit - 4

ELEMENTS OF COST: OVERHEADS

VERY SHORT ANSWER TYPE QUESTIONS:

Q2. Define Overhead.

Ans: Overhead comprise of indirect materials, indirect labour and indirect expenses which are not directly identifiable or allocable to a cost object, overheads may be defined as the aggregate of the cost of indirect material, indirect labour and such other expenses including services as cannot conveniently be charged directly to specific cost units. These overheads are all expenses other than direct expenses.

Q3. What is factory overheads?

Ans: Factory overheads are also called manufacturing overheads or works overhead or factory on cost. Factory overhead cover all expenses incurred from the stage of raw materials to finished goods. It includes indirect material, indirect labour and indirect expenses in producing an article. For example, factory rent, supervisor's salary, power and fuel, heating and lighting, depreciation of factory building, consumable stores, expenses on testing lab etc.

Q4. What is administration Overhead?

Ans: Administration overheads are cost of formulating policy, directing the organisation and controlling the operations which are not directly related to production, selling, distribution and research or development or any other function. For example, office rent, directors fees, managers remuneration, general expenses, depreciation on furniture etc.

Q5. What is selling overheads?

Ans: These are expenses incurred for actual sales and promotion of sales. For example, salaries of sales managers, travelling expenses of salesman, advertisement, depreciation of delivery van, showroom rent etc.

Q6. What cost allocation?

Ans: CIMA defines cost allocation as, "the charging of discrete identifiable items of cost to cost centres or cost unit'. In simple words complete distribution of an item of overhead to the department or products on logical or equitable basis is called allocation. Where a cost can be clearly identified with a cost centre or cost unit, then it canbe allocated to that particular cost centre or cost unit.

Q7. What is cost apportionment?

Ans: When items of cost cannot directly charge to or accurately identifiable with any cost centres, they are distributed amongst the cost centres on some predetermined basis. This method is known as cost apportionment. The predetermination of suitable basis for apportionment is very important and usually following principles are adopted: (i) service or use (ii) survey method (iii) ability to bear.

Q8. What is cost classification?

Ans: Classification of cost is the process of grouping the components of cost under a common designation on the basis of similarities of nature, attributes or relations. It is the process of identification of each item and the systematic placement of like items together according to their common features.

Q9. What is cost absorption?

Ans: Ultimately the indirect costs or overheads as they are commonly known, will have to be distributed over the final products so that the charge is complete. This process is known as cost absorption, meaning thereby that the costs absorbed by the production during the period. Usually any of the following methods are adopted for cost absorption (i) Direct material cost percentage (ii) Direct labour cost percentage (iii) Prime cost percentage (iv) Direct labour hour rate percentage (v) Machine hour rate percentage etc.

Q10. What is under absorption?

Ans: If the amount absorbed is less than the amount incurred, which may be due to actual expenses exceeding the estimate and/or the output, or the hours worked may be less than the estimate, the difference denotes under-absorption.

Q11. What is over absorption?

Ans: 

LONG ANSWER TYPE QUESTION

Q15. Explain the treatment of over and under absorption of overheads in cost accounts.

Ans: Treatment of over and under absorption of overheads are:

(i) Writing off to costing profit and Loss Account: Small difference between the actual and absorbed amount should, simply be transferred to costing profit and loss account, if difference is large then investigate the causes and after that abnormal loss or abnormal gain shall be transferred to costing profit and loss account.

(ii) Use of Supplementary Rate: Under this method balance of under and over absorbed overheads may be charged to Work-In- Progress, finished stock and Cost of Sales proportionately with the help of supplementary rate of overhead (iii) Carry Forward To Subsequent Year : Difference should be carried forward in the expectation that next year the position will be automatically corrected.

Q16. What are the differences between apportionment of overheads and allocation of overheads?

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Q17. Discuss the different methods of absorption of factory overheads.

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Q18. What are the methods of re-apportionment of service department expenses over the production departments? Discuss.

Ans: Methods of re-apportionment of service department expenses over the production departments:

(i) Direct re-distribution method: Service department cost under this method are apportioned over the production department to another. The basis of apportionment would be department only, ignoring service rendered by one service number of workers, H.P. of machines.

(ii) Step method or Non-reciprocal method: This method gives cognizance to the service rendered by service department to another service department. Therefore, on compared to previous method, this method is more complicated because a sequence of apportionments has to be selected here. The sequence here begins with the department that renders service to the maximum number of other service departments.

(iii) Reciprocal Service method: This method recognises the fact that where there are two or more service departments they may render service to each other and, there these inter-departmental services are to be given due to weight while re-distributing the expenses of service department. The methods available for dealing with reciprocal services are:

(a) Simultaneous equation method

(b) Repeated distribution method

(c) Trial and error method

Q19. How do you deal with the following in cost account?

(i) Packing expenses

(ii) Fringe benefits

(iii) Research and Development expenses

Ans: (i) Packing expenses: Cost of primary packing necessary for protecting the product or for convenient handling, should became a part of the prime cost. The cost of packing to facilitate the transportation of the product from the factory to the customer should become a part of the distribution cost. If the cost of special packing is at the request of the customer, the same should be charged to the specific order or the job. The cost of fancy packing necessary to attract customers'is an advertising expenditure. Hence, it is to be treated as a selling overhead.

(ii) Fringe benefits: There are the additional payments or facilities provided to the workers apart from their salary and direct cost allowances like house rent and city compensatory allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct charged by means of a supplementary wage or labout rate, otherwise these may be collected as a part of production overheads.

(iii) Research and Development expenses: If research is conducted in the methods of production, the expenses should be charged to production overheads. If the research relates to administration, the expenses are charged to administration overheads. If it is related to market research, the expenses are charged to selling and distribution overheads. Development costs incurred in connection with a particular product should be charged directly to that product. Such expenses are usually treated as deferred revenue expenditure and usually recovered as cost per unit of the product when production is fully established. Routine nature research expenses are charged to general overheads.

Q20. Explain the various needs of classification of overheads into fixed and variable.

Ans: Following are the needs of classification of overheads into fixed and variable.

i) Helps in preparation of flexible budget: A flexible budget can be prepared for different levels of output if overheads are budget into fixed and variable.

ii) Helps in taking managerial decision : It helps the management in taking decision regarding the utilization of plant capacity by exploring export market by price reduction etc.

iii) Effective cost control: Variable expenses can be controlled by the lower level management while control of fixed expenses is left with the top management.

iv) Marginal costing and Break even chart: For the technique of marginal costing, preparation of break even chart and study of cost volume profit relationship, division of overhead costs into fixed and variable is essential.

v) Method of absorption overhead: Absorption of overheads among the various products and jobs is done by two different rates of absorption.

a) A fixed overhead rate for the absorption of fixed overheads and

b) A variable overhead rate for the absorption of variable overheads.

Q21. What are the bases of apportionment of expenses?

Ans: Basis of apportionment of some service department expenses :

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Q22. What is machine hour rate? How is it calculated? How does it differ from labour hour rate?

Ans: DOWNLOAD PDF FOR COMPLETE SOLUTION

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