ACCA F2 Management Accounting - 2010 - Study text

Подождите немного. Документ загружается.

Chapter 6: Accounting for overheads

Fixed and variable overheads

 Definition of fixed and variable overheads

 Absorption rates for fixed and variable production overheads

 Calculating under- or over-absorbed overhead with fixed and variable

overheads

7 Fixed and variable overheads

7.1 Definition of fixed and variable overheads

Most overhead is usually fixed, but some overhead might be a variable cost.

 Fixed overhead is overhead expenditure that should be a fixed amount in total

during a given period of time, and will not change if more or less production

work is done.

 Variable overhead is overhead that increases as more production work is done.

Total variable overhead expenditure therefore depends on the volume of

production. Variable overhead is usually calculated as an amount for each direct

labour hour worked.

7.2 Absorption rates for fixed and variable production overheads

When an absorption costing system identifies fixed and variable overhead costs

separately, there will be separate absorption rates for fixed overheads and variable

overheads.

Example

The budgeted production overhead expenditure for Year 1 is $2,400,000 of fixed

overheads plus variable overheads of $3 per direct labour hour. The budgeted direct

labour hours are 100,000 for the year.

Budgeted fixed overhead 2,400,000

Budgeted variable overhead (100,000 × $3) 300,000

Total budgeted overhead expenditure 2,700,000

The overhead absorption rate per direct labour hour is calculated as a separate rate

for fixed and variable overheads:

Fixed overhead absorption rate ($2,400,000/100,000) 24

Variable overhead absorption rate 3

Total absorption rate per direct labour hour 27

Paper F2: Management accounting

156 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Total overhead expenditure

The total fixed overhead expenditure is unaffected by changes in production

volume. However, total variable overhead expenditure increases or falls with

increases or falls in production volume.

Unit overhead cost and overhead absorption rate

The budgeted fixed overhead cost per unit or per direct labour hour decreases as the

planned production volume increases. The variable overhead absorption rate and

spending rate is the same, regardless of the volume of production.

Example

Suppose that in the previous example, the budget is amended, and the new plan is

to work 120,000 direct labour hours, rather than 100,000 hours. The new budget for

overhead expenditure will be as follows:

Budgeted fixed overhead 2,400,000

Budgeted variable overhead (120,000 × $3) 360,000

Total budgeted overhead expenditure 2,760,000

The overhead absorption rate per direct labour hour would be calculated as follows,

with the fixed overhead absorption rate lower due to the higher budgeted direct

labour hours, but the variable overhead absorption rate unchanged.

Fixed overhead absorption rate ($2,400,000/120,000) 20

Variable overhead absorption rate 3

Total absorption rate/direct labour hour 23

7.3 Calculating under- or over-absorbed overhead with fixed and variable

overheads

When there is some variable overhead, the method of calculating under- or over-

absorbed overhead is slightly different from the calculation when all overheads are

fixed. This is because variable overhead expenditure is expected to vary with the

actual volume of activity.

Example

A company has budgeted fixed production overheads of $600,000 for Year 3, and a

variable overhead cost of $2 per direct labour hour. The budgeted production

volume is 60,000 direct labour hours of work. Actual production in Year 3 was

62,000 direct labour hours, and actual overhead expenditure (fixed and variable)

was $790,000 in total.

Chapter 6: Accounting for overheads

Required

Calculate the under- or over-absorbed overhead in the year, and analyse this into an

expenditure and a volume variance.

Answer

The fixed overhead absorption rate is $600,000/60,000 hours = $10 per direct labour

hour.

Absorbed overheads

Fixed overheads (62,000 hours × $10) 620,000

Variable overheads (62,000 hours × $2) 124,000

Total absorbed overheads 744,000

Actual overhead expenditure 790,000

Under-absorbed overheads 46,000

Explaining the under-absorbed overhead

This under-absorbed overhead of $46,000 can be analysed into an expenditure and a

volume variance. There are two important points to note.

 The expected overhead expenditure is the budgeted fixed overhead expenditure

plus the expected variable overhead expenditure for the hours actually worked.

 The volume variance affects fixed overheads only, not variable overheads.

Expected overhead expenditure

Expected fixed overheads (= Budgeted fixed overhead) 600,000

Expected variable overheads (62,000 × $2) 124,000

Total expected overhead expenditure 724,000

Actual overhead expenditure 790,000

Expenditure variance 66,000 Adverse

Hours

Budgeted volume (direct labour hours) 60,000

Actual volume (direct labour hours) 62,000

Volume variance (direct labour hours) 2,000 Favourable

Fixed overhead absorption rate/direct labour hour $10

Volume variance in $ (fixed overhead only) $20,000 Favourable

Summary

Expenditure variance 66,000 Adverse

Volume variance 20,000 Favourable

Total under-absorbed overhead 46,000 Adverse

Paper F2: Management accounting

158 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Exercise 5

A company has budgeted fixed production overheads of $800,000 for Year 4, and a

variable overhead cost of $4 per direct labour hour. The budgeted production

volume is 100,000 direct labour hours of work. Actual production in Year 4 was

97,000 direct labour hours, and actual overhead expenditure (fixed and variable)

was $1,120,000 in total.

Required

Calculate the under- or over-absorbed overhead in the year, and analyse this into an

expenditure and a volume variance.

Practice multiple choice questions

1 A factory consists of two production centres P1 and P2, and two service centres S1

and S2. The total overheads allocated and apportioned to each of these cost centres

is as follows.

P1 P2 S1 S2

Total overheads $300,000 $450,000 $320,000 $350,000

The work done by the service centres for each of the other centres has been

estimated as follows:

P1 P2 S1 S2

% of service centre S1 to: 30% 70% - -

% of service centre S2 to: 30% 40% 30% -

The costs of the service centres are apportioned to production cost centres using a

method that fully recognises any work done by one service cost centre for another.

What are the total overheads for production cost centre P2 after the re-

apportionment of all service centre costs?

A $814,000

B $874,000

C $887,500

D $947,500 (2 marks)

2 A company manufactures two products Y and Z in a factory that has two

production cost centres, CC1 and CC2. The following budgeted data are available.

Product

Allocated and apportioned fixed

overheads

hours

per unit

hours

per unit

Cost centre

CC1 4 2 $660,000

CC2 5 4 $540,000

Budgeted output is 20,000 units of each product. Fixed overhead costs are absorbed

on a direct labour hour basis.

Chapter 6: Accounting for overheads

What is the budgeted fixed overhead cost per unit for Product Z?

A $23.00

B $24.00

C $37.00

D $39.50 (2 marks)

A company manufactures two products P and Q in a factory that has two

production cost centres, C1 and C2. The following budgeted data are available.

Cost centre

C1 C2

Allocated and apportioned fixed overheads $324,000 $583,200

Direct labour hours per unit:

Product P 2 5

Product Q 4 3

Budgeted output is 15,000 units of each product. Fixed overhead costs are absorbed

on a direct labour hour basis.

What is the budgeted fixed overhead cost per unit for Product Q?

A $28.98

B $30.24

C $31.50

D $32.58 (2 marks)

4 A manufacturing company uses absorption costing with a predetermined fixed

overhead absorption rate based on direct labour hours worked. The following

situations occurred in the previous three months.

(i) Budgeted direct labour hours were more than the actual direct labour hours

worked.

(ii) Actual fixed overhead expenditure was higher than the planned expenditure.

Which one of the following statements is correct?

A Situation (i) would cause overheads to be over-absorbed and situation (ii)

would cause overheads to be under-absorbed.

B Situation (i) would cause overheads to be under-absorbed and situation (ii)

would cause overheads to be over-absorbed.

C Both situations would cause overheads to be over-absorbed.

D Both situations would cause overheads to be under-absorbed. (2 marks)

5 A manufacturing company budgeted 36,000 direct labour hours of work and

overhead spending of $144,000. It uses absorption costing, and absorbs overhead

costs on the basis of direct labour hours. During the period, overhead spending was

$157,500 and 37,500 direct labour hours were worked.

Paper F2: Management accounting

160 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

What was the amount of overheads under- or over-absorbed?

A Under-absorbed $13,500

B Over-absorbed $13,500

C Over-absorbed $6,000

D Under-absorbed $7,500 (2 marks)

6 A manufacturing company budgeted 24,000 direct labour hours of work and

production overhead spending of $300,000. It uses absorption costing, and absorbs

overhead costs on the basis of direct labour hours. During the period, overhead

spending was $318,500 and 26,000 direct labour hours were worked.

What was the amount of overheads under- or over-absorbed?

A Over-absorbed $6,500

B Over-absorbed $24,500

C Over-absorbed $25,000

D Under-absorbed $18,500 (2 marks)

Paper F2

Management Accounting

CHAPTER

Accounting for costs:

ledger entries

Contents

1 Thecostledger

2 Doubleentryaccountingforcosts:basicrules

3 Doubleentryaccountingforcosts:overheads

4 Completingthecostaccountingincome

statement

Paper F2: Management Accounting

162 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

The cost ledger

 The nature and purpose of the cost ledger

 Accounts in the cost ledger

 Double entry cost accounting system

1 The cost ledger

1.1 The nature and purpose of the cost ledger

An accounting system is needed to record costs of production and sales. One way of

doing this is to record transactions relating to costs in a set of cost accounts. Cost

accounts are held in the cost ledger. (A ledger is a word meaning ‘a collection of

related accounts’.)

If you already know about double entry ledger accounting, you will find this chapter

easier to follow than if you are reading about double entry accounting systems for the

first time. If you do not know anything about double entry accounting systems (debits

and credits) you should be able to learn what you need to know by reading this

chapter carefully.

1.2 Accounts in the cost ledger

The accounts in the cost ledger are used to record transactions relating to:

 the costs of materials, labour and expenses

 overhead costs

 the costs of production

 sales and the cost of sales

 profit or loss.

There are other accounts in the cost ledger, such as an account for recording the

under-absorbed or over-absorbed production overhead within a system of

absorption costing.

There might also be accounts for recording the cost of abnormal losses (process

costing) or variances (standard costing). These accounts will be explained in later

chapters dealing with process costing and standard costing.

The inventory accounts

There are accounts in the cost ledger for recording work as it progresses through the

production process. In a simple cost accounting system, there are accounts for raw

materials, work-in-progress and finished goods:

 Raw materials. A costing system keeps a continuous record of transactions

involving receipts into stores and issues from stores. The raw materials

Chapter 7: Accounting for costs: ledger entries

inventory account, or stores account, is used to record the cost of materials

purchased, and the cost of materials issued from the stores department to other

departments. The balance on the raw materials inventory account shows the cost

of the raw materials currently held as inventory.

 Work-in-progress (WIP). A costing system keeps a continuous record of costs of

production. In an absorption costing system, the WIP account records the costs

of direct materials, direct labour and direct expenses (if any), and absorbed

production overhead costs. It also records the cost of finished production.

(Finished production is either transferred to a finished goods store or sold

directly to the customer.) The balance on the WIP inventory account shows the

cost of production still in progress and not yet completed. This inventory of

unfinished production is called ‘work–in-progress’.

 Finished goods. The finished goods account is a stores account for completed

production that has not yet been sold. It records the production cost of

completed units transferred from production into the finished goods store, and

the production cost of goods that are then transferred from the store and sold to

customers. The balance on the finished goods inventory account shows the

production cost of finished output held in store.

1.3 Double entry cost accounting system

A cost accounting system, like the financial accounting book-keeping system, uses a

double entry system for recording transactions. With double entry, every

transaction is recorded twice in the accounts:

 as a debit entry in one account, and

 as a credit entry in a different account.

The total of debit entries and the total of credit entries must always be equal. It is

useful to think of an account as having a T shape, with a debit side and a credit side,

as follows:

Name of the account

Debit side

Credit side

The balance on an account is the difference between the total value of entries in the

debit side and the total value of entries on the credit side.

 When the total value of debit entries is higher than the total value of credit

entries, there is a debit balance.

 When the total value of credit entries is higher than the total value of debit

entries, there is a credit balance.

The balance on the three inventory accounts should always be either zero (= no

inventory) or a debit balance (= the cost of the inventory that is currently held).

Paper F2: Management Accounting

Double entry accounting for costs: basic rules

 Recording costs incurred

 Costs of production and the WIP account

 From raw materials to cost of sales

 Non-production overheads

 Opening and closing inventory

 The costing system income statement

 The financial ledger control account

2 Double entry accounting for costs: basic rules

There are some basic rules that need to be remembered when recording costs in the

cost accounting system.

2.1 Recording costs incurred

Some accounts are used to record costs that are incurred.

 The raw materials account records the cost of materials purchased.

 The wages and salaries cost account records the cost of labour. (Sometimes, you

might come across a direct labour cost account, which records the wages and

salary costs of direct labour only.)

 Overhead cost accounts record the overhead costs incurred.

 The work-in-progress account records the production costs of items produced.

It records the cost of direct materials, direct labour and production overheads

absorbed. These costs are transferred to work in progress from the raw materials

account, wages and salaries cost account and production overheads account.

 The finished goods account records the production cost of completed

production that is transferred from work in progress to the store of finished

goods inventory.

 The cost of sales account records the total cost of sales, which consists of

production costs, administration costs and sales and distribution costs.

Costs incurred are recorded as debit entries in these accounts.

2.2 Costs of production and the WIP account

The WIP account is used to record the costs of production – direct materials, direct

labour and production overheads absorbed. These costs are recorded in a double

entry cost accounting system as follows:

ACCA F2 Management Accounting - 2010 - Study text - Emile Woolf Publishing

Подождите немного. Документ загружается.