Overheads and Job Costing

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					Chapter 3 - Overheads and Job Costing
Overheads (indirect costs) cannot be traced directly
to a cost object because they are usually common to
several cost objects.

Plant-wide (blanket) overhead rates
A single overhead rate is established for the
organization as a whole. May be based on direct
labour hours (DLH), machine hours (MH), or units of
production.

    Budgeted production overheads
       Budgeted activity level

Budgeted overheads           R200 000
DLH                          20 000
Overhead rate                R10 per DLH

Q6-9 (b)
Existing Method
Blanket overhead recovery rate

Budgeted overheads – R

MH –



Overhead rate – R     per MH
                         1
Spandgate                       (b)         (a)
Materials
Labour
Direct expenses
Prime cost
Factory overheads
Production cost
Admin, selling and distri
Total cost
Net profit
Selling price

Departmental Overhead Rates
Stage 1: allocate/apportion manufacturing
overheads to service and production centres on an
appropriate basis, eg rent on floor space

Stage 2: apportion service centers to production
centres on basis of usage, eg stores on the number
of stores requisitions from the production department

Stage 3: calculate an overhead absorption rate for
each production centre based on DLH, MH etc

Q6-9 (a)




                            2
               Basis   Machine Assembly Finish Maint   Stores Total
Wages
Supervisors
Consumables
Depreciation
Electricity
Insurance
Rent
Reapportion
Stores
Maintenance
Total

 Overhead rate


                                   3
Under/over applied overheads
Overhead rates are based on budgeted annual
overhead expenditure and activity and it is unlikely
that the actual overheads incurred will equal that
allocated to products manufactured.

If actual overheads are less than budgeted there will
be an over-recovery of overheads.
If the actual overheads are greater than budgeted
there will be an under-recovery of overheads.
The under/over recovery is also called a volume
variance.
The under/over recovery is charged to the income
statement as a period cost

Q6-9 (c)
        Fixed Production Overhead




Q6-9 (d)




                           4
CHAPTER 7 – ABSORPTION AND VARIABLE
COSTING
AC fixed overheads included in the value of stock. VC
variable costs only used in value of stock
Q 5-14
ABSORPTION COSTING                 FEB          MAR
Sales
Cost of sales
Opening stock
Production
Less: closing stock
Normal gross profit
Over/(under) applied
GROSS PROFIT
Selling and admin – fixed
                    Variable
NET PROFIT

VARIABLE COSTING
Sales
Less: total variable costs
Opening stock
Production
Less: closing stock
Variable cost of sales
Add: variable selling
CONTRIBUTION
Fixed – production
        Selling
NET PROFIT
                             5
   Chapter 5 – Process Costing
   A process costing system is used in those industries
   where masses of similar products or services are
   produced. Products are produced in the same
   manner and consume the same amount of direct
   costs and overheads. It is therefore unnecessary to
   assign costs to individual units of output. Industries
   where process costing is widely used include
   chemical processing, oil refining, food processing
   and brewing.

Process 1      Process 2          Process 3
Material       Prev process       Prev
Labour         Material           processes       Finished
Overhead       Labour             Material        goods
               Overhead           Labour
                                  Overhead



   Equivalent units (EU)
   1 000 units 30% complete is the equivalent of 300
   completed units.

   Normal loss/spoilage
   Certain losses are inherent in the production process
   and cannot be eliminated. For example, liquids may
   evaporate, part of the cloth required to make a suit
   may be lost and losses occur in cutting wood to
   make furniture. These losses occur under efficient
   operating conditions and are unavoidable. Because
                              6
     they are an inherent part of the production process
     normal losses are absorbed by good production.
     The cost of the normal loss is absorbed the good
     production.

     Abnormal loss/spoilage
     These are losses that are not expected to occur
     under efficient operating conditions, for example the
     improper mixing of ingredients, the use of inferior
     materials and incorrect cutting of cloth. These
     losses are not inherent in the production process
     and because they arise from inefficiencies they are
     not included in the process cost. The abnormal loss
     is treated as a period cost and written off in the P
     and L at the end of the accounting period.

     Drury 5-34
     BWIP + S and C = Trf out



     S and C + NS + AS + CWIP = Trf in


             Total       Trf In       Mat       CC
BWIP
S and C
NS

                                  7
AS
CWIP

Costs




        8
Cost of Completed Production
BWIP (given)
Previous process
Materials
CC

Abnormal Loss
Previous process
Materials

CWIP
Previous process
Materials
CC

Rounding




                      9

				
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