Chapter 7 - A closer look at overhead costs. The main contents of this chapter include all of the following: What are overhead costs? allocating indirect costs: some general principles, allocating overhead costs to products, activity-based costing compared with the two-stage cost allocation process, evaluating the alternatives for allocating overheads, issues in estimating overhead rates, allocating indirect costs to responsibility centres, other issues in allocating support department costs. | Chapter 7 A closer look at overhead costs 7- Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith Outline What are overhead costs? Allocating indirect costs: some general principles Allocating overhead costs to products Activity-based costing compared with the two-stage cost allocation process Evaluating the alternatives for allocating overheads Issues in estimating overhead rates Allocating indirect costs to responsibility centres Other issues in allocating support department costs 7- Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith What are overhead costs? For product costing these are indirect product costs For responsibility costing these are the indirect costs of responsibility areas Manufacturing overhead costs All manufacturing costs other than direct material and direct labour . | Chapter 7 A closer look at overhead costs 7- Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith Outline What are overhead costs? Allocating indirect costs: some general principles Allocating overhead costs to products Activity-based costing compared with the two-stage cost allocation process Evaluating the alternatives for allocating overheads Issues in estimating overhead rates Allocating indirect costs to responsibility centres Other issues in allocating support department costs 7- Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith What are overhead costs? For product costing these are indirect product costs For responsibility costing these are the indirect costs of responsibility areas Manufacturing overhead costs All manufacturing costs other than direct material and direct labour costs 7- (cont.) Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith What are overhead costs? (cont.) Incurred for a variety of products and cannot be traced to individual products Can be traced to individual products but it is more appropriate to treat this cost as a cost of all outputs Includes depreciation, factory insurance, factory electricity costs, cost of manufacturing support departments, indirect materials, indirect labour Non-manufacturing costs are all costs incurred outside of manufacturing 7- Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith Allocating indirect costs: some 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 cost objects; therefore they need to be allocated A cost
