1. Chapter 8 : Accounting for overheads
Presentation
Chapter 8 : Accounting for overheads
By: 杨韬韧、熊莹、胡梦琦、刘紫云

2. content Part 1 : Introduction&Overhead allocation
Part 2 : Overhead apportionment
Part 3 : Overhead absorption
Part 4 : under-/over-absorbed overhead

3. (Shared on a fair basis)
Absorption costing method
(Shared on a fair basis)
Allocate
Direct cost
Cost Unit
Total
Cost
Production Departments
Allocate
Apportion
Reapportion
Absorb
Cost Unit
Indirect cost
Cost Centres
Production Departments
(Overheads)
Service
Departments
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4. Pratical reasons for absorption costing method
1、Inventory Valuations
2、Pricing Decisions
3、Profitability of Different Products

5. (items shared by several departments:rent and rates,heat and light)
Overhead allocation
Allocation is the process by which whole cost items are charged direct to a cost unit or cost centre.
Indirect labour/Indirect materials
Indirect Expenses
Selling or Distribution Department
Production area Service Department
Production Department
Overhead Cost Centre
Administrative Department
(items shared by several departments:rent and rates,heat and light)

6. Overhead apportionment
Apportionment : indirect costs are spread fairly between cost centres,(Service cost centre costs may be apportioned to production cost centres.)including 2 stages.
Stage 1 : Apportioning general overheads(to identify all overhead costs as production department , production service department , administration or selling and distribution ~.)
General overheads
Based on a fair basis
(P156)
Production Department B
Service Department A
Service DepartmentB
Production Department A
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7. Service department costs Production departments
Stage 2 : Reapportion service department costs(to reapportion all the service department costs to the production departments),
through 3 methods --
direct method,step-down method,and repeated distribution (or reciprocal) method.
direct method
repeated distribution method
step-down method
Service department costs
Production departments
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8. Production department A Production department B Based on a fair basis
①Direct method : apportioning the costs of each service cost centre to production cost centres only.
Costs of service cost centres will be apportioned to different production centres according to the proportion of one production centre in all production centres.
Service department A
Service department B
Production department A
Production department B
Based on a fair basis
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9. ②Step-down method:service centre's costs are apportioned to production departments and some service centres that use services provided.
Step 1 : Reapportion one of the service cost centre's overheads to all the other centres which make use of its services(production and service)
Step 2 : Reapportion the overheads of the remaining service cost centre to the production departments only.The other service cost centre is ignored.
There may be several results and how the results differ depends on which service department is apportioned first.
If one service cost centre has higher overhead costs and a bigger proportion of work for the other service cost centre(s),its overheads should be reapportioned first.
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10. Production department A Production department B
Service department A
Service department B
Production department A
Production department B
…………
First step
Second step
…………
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11. ③Reciprocal method : service centre costs are apportioned to the production departments and service departments that use the services.The service centre costs are gradually apportioned to the production departments.Only used when service departments use each other's services.
Repeated distribution method
Keep performing the same calculations--apportion costs of one service cost centre to the other centres(including production department(s) and service department(s)),and apportion other service cost centre in the same way for many times.
When you are dealing with a small number ,you can take the decision to apportion the figure between the production departments only.
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12. Production department A Production department B
Service department A
Service department B
Production department A
Production department B
Production department A
Production department B
Service department A
…………
Algebraic method
Use the algebra and simultaneous equations and get X,Y.
Then use the overheads X,Y,make them apportioned to the production departments using the proportions.
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13. Overhead absorption
Introduction: Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit ,job or batch costs by using a predetermined overhead absorption rates.
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14. Calculation of overhead absorption rates
Step 1 : Estimate the overhead likely to be incurred during the coming period.
Step 2 : Estimate the activity level for the period. This could be total hours , units , or direct costs.
Step 3 : Divide the estimated overhead by the budget activity level.
Step 4 : Absorb the overhead into the cost unit by applying the calculated absorption rate.
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15. Blanket absorption rates and departmental absorption rates
BAR = the budget overheads of department A and B / the predetermined activity level
DAR(SAR) = the budget overhead of A or B / the predetermined activity level
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16. Over and under absorption of overheads
Ⅰ.What is over and under absorption?
Over absorption--the overheads charged > overheads actually incurred
Under absorption--the overheads charged < overheads actually incurred
Campared with actual overheads
Ⅱ.Why does over and under absorption of overheads occur?
estimated overhead
The overhead absorption rate=
budgeted activity level
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17. Ledger entries relating to overheads
It is highly unlikely that the actual amount and the amount calculated by a predetermined rate will be the same.The difference is called under- or over-absorbed overhead.
The entries made in the cash book and the nominal ledger are the actual amounts.
Ⅰ.How to deal with the difference in the cost accounting books?
We need to have an account to collect under- or over-absorbed amounts.
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18. 谢谢观看!
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