Unit 5 | Cost Accounting | 2 Marks Q&A |

 

UNIT - V

PART A (THEORY)

1. What do you understand by overheads?

In business, overhead or overhead expense refers to an ongoing expense of operating a business; it is also known as an "operating expense". Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits.

2. What is step method?

Under this method, service departments are arranged in the descending order of serviceability. The service department which renders service to all or maximum number of the other service departments and productions departments is taken up for distribution. Then the second service cost centre is taken up and this process is repeated till costs of all the services cost centres have been distributed to production departments. This method is also called step method or step ladder method because the tabulation of the distribution resemble a step ladder.

3.What is absorption of overheads?

Absorption of overheads is the charging of overheads of a department or a cost centre to the cost units which pass through the department or cost centre. In order to equitable charge the overhead expenses to cost units, a suitable base must be adopted.

4. Differentiate idle time and overtime.

Idle Time

Idle time means the amount of time the workers remain idle in a normal working day. The idle time is usually caused by a sudden fault in machine or equipment, power failure, lack of orders for the product, inefficient work scheduling, defective materials and shortage of raw materials etc. The cost associated with idle time is treated as indirect labour cost and should, therefore, be included in manufacturing overhead cost.

Overtime

Overtime is the amount of time someone works beyond normal working hours. Work performed by an employee or worker in excess of a basic workday (typically 8 hours a day, 5 days a week) as defined by company rules, job contract, statute, or union (collective) agreement.

5. Explain over absorption of overheads.

If overhead is over absorbed, this means that fewer actual overhead costs were incurred than expected, so that more cost is applied to cost objects than were actually incurred. This means that the recognition of expense is reduced in the current period, which increases profits. For example, if the overhead rate is predetermined to be Rs. 20 per direct labour hour consumed, but the actual amount should have been Rs.18 per hour, then the Rs.2 difference is considered to be over absorbed overhead.

6. What are the functional classifications of overheads?

• Manufacturing overheads
• Administrative Overheads
• Selling Overheads
• Distribution Overheads
• Research and development cost

7. Explain variable overheads.

Variable overhead is those manufacturing costs that vary in relation to changes in production output. Examples of variable overhead are Materials, Labour, Factory expenses etc.

8. What is Apportionment?

One of the essential functions of cost accounting is to relate the costs to its various elements forming part of the cost of production. Cost allocation is also referred to as Cost apportionment. Cost apportionment means the allotment of proportions of items of cost of cost centers or cost units.

9. Define "Fixed overheads".

Fixed overhead is a set of costs that do not vary as a result of changes in activity. These costs are needed in order to operate a business. One should always be aware of the total amount of fixed overhead costs that a business incurs, so that management can plan to generate a sufficient amount of contribution margin from the sale of products and services to at least offset the amount of fixed overhead. Otherwise, it is impossible to generate a profit.

10. What is machine hour rate?

Machine hour rate is the cost of running a machine per hour. It is one of the methods of absorbing factory expenses to production. It is used in those industries or departments where machinery is predominant and there is little or practically no manual labour.

Machine Hour Rate= Factory overheads (Budgeted or Actual) Machine Hours (Estimated or Actual)

11. What is Apportionment of Overheads?

Distribution of an overhead cost to several departments or cost centers is known as apportionment of overheads. It is the process of charging or apportioning costs to a number of cost centers or cost units. If a given cost is common to two or more departments or cost centers, such cost should be apportioned or divided among these departments on an equitable basis. For example, the amount of factory rent should be apportioned to all the departments on the basis of area occupied.

12. Define Overheads.

According to Whelden, Overhead may be defined as "the cost of indirect material, indirect labour and such other expenses including services as cannot be conveniently charged to a specific unit. Alternatively, overheads are all expenses other than direct expenses".

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