Lecture Management accounting: Information for creating and managing value (4/e) - Chapter 7 "A closer look at overhead costs". This chapter presents the following content: What are overhead costs? Allocating indirect costs: some general principles, allocating overhead costs to products,. | Chapter 7 A closer look at overhead costs 7- 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 continued 7- What are overhead costs? Incurred for a variety of products that cannot be traced to individual products Can be traced to individual product but not worth the trouble Can be traced to individual products but it’s more appropriate to treat this cost as a cost of all output 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- 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 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 continued 7- 7- Allocating indirect costs: some 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) 7- 7- 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 possible approaches A plantwide rate Departmental rate Activity-based costing continued 7- Allocating overhead costs | Chapter 7 A closer look at overhead costs 7- 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 continued 7- What are overhead costs? Incurred for a variety of products that cannot be traced to individual products Can be traced to individual product but not worth the trouble Can be traced to individual products but it’s more appropriate to treat this cost as a cost of all output 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- 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
