Accounting Q&A · Cost and Management Accounting · Topic 6
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
Budgeted factory overhead is 120,000 and budgeted machine hours are 20,000. The rate is 6 per hour. At 18,000 hours, overhead absorbed is 108,000. If actual overhead is 114,000, it is under-absorbed by 6,000.
See IAS 2 Inventories for financial reporting requirements.
Core concepts
1. What is production overhead?
Indirect production costs such as factory rent and supervision.
2. What is overhead allocation?
Assigning an entire indirect cost to the cost centre responsible for it when traceable at that level.
3. What is overhead apportionment?
Sharing a common cost across centres using an appropriate basis.
4. What is overhead absorption?
Assigning production overhead to products or jobs using an activity rate.
5. How do you calculate a predetermined rate?
Divide budgeted overhead by the budgeted activity base.
6. When are machine hours a suitable base?
When equipment usage is a major driver of the overhead.
7. When might labour hours be suitable?
When indirect production costs broadly follow labour activity.
8. Why distinguish production and service departments?
Service centres support production centres and their costs may need redistribution.
9. What does direct redistribution do?
It allocates service centre costs to production centres and ignores service provided between service centres.
10. What does the step-down method do?
It allocates service centres sequentially without allocating back to centres already closed.
Worked applications
11. What does the reciprocal method recognise?
Mutual services between support departments.
12. Budgeted overhead is 90,000 and machine hours are 15,000. What is the rate?
6 per machine hour.
13. How much overhead does a 40-hour job absorb at that rate?
240.
14. Actual hours are 13,000 at the rate of 6. What is absorbed?
78,000.
15. Actual overhead is 82,000. What is the difference from the 78,000 absorbed?
4,000 under-absorbed.
16. What is over-absorbed overhead?
Absorbed overhead exceeds actual overhead.
17. What can cause under-absorption?
Higher actual costs, lower activity or both.
18. How do you apportion factory rent by floor area?
Multiply rent by each department’s share of total floor area.
19. A department uses 300 of 1,200 square metres. How much of 24,000 rent is apportioned?
6,000.
Review and exam practice
20. What is a blanket rate?
One absorption rate used across the factory or organisation.
21. When are departmental rates more informative?
When departments consume overhead differently and a single rate would distort product costs.
22. How does IAS 2 treat low production volume for fixed overhead allocation?
Use normal capacity and expense fixed overhead left unallocated because of low production.
23. How is variable production overhead allocated under IAS 2?
On the basis of actual use of production facilities.
24. Does absorbed overhead show the extra cost of one more order?
It can include fixed allocations. Identify which costs actually change for the decision.
25. What should an overhead reconciliation show?
Actual overhead, absorbed overhead, the difference and how it was treated.