Lecture Management accounting: An Australian perspective - Chapter 7 provides a closer look at overhead costs. This chapter include objectives: What are overhead costs? Allocating indirect costs: some general principles, allocating overhead costs to products. Inviting you refer. | Chapter 7 A closer look at overhead costs What are overhead costs? For product costing, these are indirect product costs For responsibility costing, these are indirect costs of responsibility areas Manufacturing overhead costs All manufacturing costs other than direct material and direct labour continued What are overhead costs? Manufacturing overhead costs Incurred for a variety of products that cannot be traced to individual products Can be traced to individual product but it is not worth the trouble Can be traced to individual produce but where it is more appropriate to treat this cost as a cost of all output continued What are overhead costs Manufacturing overhead includes the cost of manufacturing support departments Includes the cost of indirect material and indirect labour Non-manufacturing costs are all costs incurred outside of manufacturing May be included in product costs for use in internal product-related decisions, but not for external reporting Allocating . | Chapter 7 A closer look at overhead costs What are overhead costs? For product costing, these are indirect product costs For responsibility costing, these are indirect costs of responsibility areas Manufacturing overhead costs All manufacturing costs other than direct material and direct labour continued What are overhead costs? Manufacturing overhead costs Incurred for a variety of products that cannot be traced to individual products Can be traced to individual product but it is not worth the trouble Can be traced to individual produce but where it is more appropriate to treat this cost as a cost of all output continued What are overhead costs Manufacturing overhead includes the cost of manufacturing support departments Includes the cost of indirect material and indirect labour Non-manufacturing costs are all costs incurred outside of manufacturing May be included in product costs for use in internal product-related decisions, but not for external reporting Allocating indirect costs: general principles Using cost pools Cost assignment can take two forms Direct costs can be traced directly to products Indirect costs cannot be traced to cot objected, so need to be allocated A cost pool is a collection of costs that are to be allocated to cost objects Have a common allocation base Often used to simplify the allocation process Allocating indirect costs: general principles Determining cost allocation bases A cost allocation base is some factor or variable that allows us to allocate costs in a cost pool to cost objects Ideally should be a cost driver A cost driver is an activity or factor that causes costs to be incurred Ideally cost should increase or decrease in direct proportion to the allocation case (or cost driver) Allocating overhead costs to products Reliable product costs are important in a range of management decisions An important issue is how to allocate indirect costs to obtain a reliable estimate of a product’s cost Three .
