Unit 5 – Accounting for Overheads

Objective
 Concept and classification of overheads
 Factory overheads
 Fixed, variable and semi-variable overheads
 Accounting for overheads
 Apportionment of service department overheads to production department
 Overhead absorption rates
 Selecting the overhead absorption rate

Learning Outcome
To compute statement showing allocation and apportionment of overheads of service
department to producing departments by using repeated and simultaneous equation
method.

5.1 Introduction
Analysis and collection of overheads, their allocation and apportionment to different cost
centers, and absorption to goods or services each play essential roles in cost determination
and management in Cost Accounting. A system that distributes overheads more evenly can
only lead to increased accuracy in determining the cost of goods or services. As a result,
standard processes for overhead allocation, apportionment, and absorption must be
followed when preparing cost statements.

5.2 Concept of Overheads

Overheads are indirect materials, indirect employee costs, and indirect expenses that are
not directly attributable or economically allocable to a cost object. It refers to the sum of all
indirect expenditures.  These indirect expenses are spent across several cost units or cost
centers, rather than for a single product unit or cost center. When determining the total
cost of different items, the cost of overheads should be suitably apportioned to these
various cost units or cost centers. Manufacturing or non-manufacturing overheads are both
possible.

5.3 Accounting for Overheads

Overhead distribution is the most difficult task in cost accounting because there is no clear
base on which to allocate overheads. The cost of indirect material, indirect labor, and
indirect expenses is allocated to a production department or a service department through
overhead distribution. This distribution of overheads is divided into four parts:
I. Classification and Collection of Overheads
II. Allocation and Apportionment of Overheads
III. Redistribution of Overheads
IV. Absorption of Overheads

5.4 Classification and Collection of Overheads

 5.4.1 Classification of Overheads
Overheads may be classified on the basis of their nature, variability, and function.
On the basis of NATURE or ELEMENTS:
I. Indirect Material: Indirect materials are those that do not constitute a component of the
finished product or cannot be easily associated to it. For example: consumable stores,
nuts, bolts, loose tools, etc.
II. Indirect Labor: Indirect wages are the wages paid to the workers who facilitate or assist
in the production process instead of being actually involved in it. It is the cost that
cannot be linked to a specific product unit.
III. Indirect Expenses: Indirect Expenses are costs that are not directly related to a job,
project or a product, such as indirect materials and indirect labor. Rent, repairs, taxes,
depreciation, insurance are some examples.
On the basis of VARIABILITY:
I. Fixed overheads: Fixed overheads are also known as period costs or capacity costs,
remain constant or fixed in total regardless of changes in production or sales levels. A
change in output level within a given period has no effect on such costs as long as the
change in output is not significant.
II. Variable Overheads: Variable overheads fluctuate proportionately with changes
in production and sales volume. The variable cost per unit remains constant while the
overall cost varies with output levels. They increase in total with the increase in volume
and vice versa. For example: Sales commission.
III. Semi-Variable Overheads: These costs are made up of both fixed and variable charges.
They are influenced in part by changes in activity levels. They vary with volume due to
the variable component, and they do not alter in direct proportion to output due to the
fixed component. Consider the cost of a phone call. It features a monthly rental fee as
well as per-call fees. These overhead expenses remain constant at first but grow as
volume increases.
On the basis of FUNCTION:
I. Factory Overheads: Factory overheads, also known as production or works overheads or
manufacturing overheads, are the indirect costs of converting raw materials into
finished goods. For example: Rent of factory building, depreciation on machines, etc.
II. Administration Overheads: Overheads are incurred in connection with the general
administration of the company. For example: Manager’s salary, audit fees, printing and
stationery, etc.
III. Selling and Distribution Overheads: Selling costs are costs incurred to generate demand,
attract potential buyers, and maintain existing customers. Overheads for managing
stockpiles and delivering items to customers are incurred as part of the distribution
process. For example: Transportation charges, carriage outward, marketing and
advertising expenses, etc.
5.4.2 Collection of Overheads
Overheads collection refers to the grouping of indirect expenses from books of account and
supporting/corroborative records into predefined categories based on their nature and
purpose. Overheads are collected on the basis of pre-planned groupings known as cost
pools. Overheads can be collected from the following sources:

 Invoices for rent, insurance, and other charges can be used to collect indirect expenses
paid.
 Overheads can also be collected through journal entries
 Store requisitions are used to collect the indirect materials cost.
 Wage sheets or payroll statement are used to collect the indirect labour cost.

5.5 Allocation and Apportionment of Overheads

Allocation of overheads: CIMA defines Cost Allocation as “the charging of discrete,
identifiable items of cost to cost centres or cost units”.
Allocation means charging overheads directly to specific departments. Allocating overheads
entails assigning a whole item of cost directly to a cost centre. An item of expense which can
be directly related to a cost centre is to be allocated to that cost centre. For example:
Depreciation of a certain machine should be allocated to a specific cost department if the
machine is directly related to that department.
Apportionment of overheads: CIMA, London has defined it as “that part of cost attribution
which shares costs among two or more cost centers or cost units in proportion to the
estimated benefit received, using a proxy”.
Apportionment of overhead is the equitable distribution of overheads across many cost
centers. When indirect expenses are shared by multiple cost centers, they must be allocated
to the cost centers on an equal basis. For example: The salary of the general manager
cannot be charged entirely to one department or cost center, but must be distributed
evenly among all departments or cost centers.

5.6 Primary Distribution of Overheads

Overhead costs are apportioned or distributed on logical bases when they are not allocable.
Some of these logical bases are as follows:

Overheads Basis of Apportionment

Rent, rates and taxes Area occupied/Floor space
Fire precautions
Lighting and heating
Air-conditioning
Power and Electricity Kilo watt hours or Horse power of machine
or number of machine hours
Indirect wages Number of working hours
General expenses Working hours or direct wage
Stores overhead Value of material or volume of stock or
 Material handling units of stock
Depreciation of plant and machinery Value of fixed asset
Repairs and maintenance of plant and
machinery
Perquisites Number of workers
Labor Welfare Expense
Time keeping expense

Illustration: Advita Ltd. has divided its production activities in five departments. The
manufacturing departments are department A, D, V, and I, while the service department is
department T.
The actual costs for a period are as follows:

Costs Amount (Rs.)

Rent of Factory 200000
Depreciation on plant 10000
Electricity 100000
Employee welfare expenses 20000
General Expense 35000
Repair and maintenance of plant 20000
Stores overhead 15000

Information related of various departments:

Particulars Dept A Dept D Dept V Dept I Dept T

No. of 15 15 10 5 5
workers
Total wages 15000 15000 10000 5000 5000
(Rs.)
Kilo watt 160 100 80 40 20
hours
Value of 1500 2000 1000 500 -
stock (units)
Value of 15000 5000 - - -
Plant (Rs.)
Area (sq. ft.) 140 120 110 90 40

Calculated the cost apportioned to each department.

Solution:

Particulars Basis of Dept A Dept D Dept V Dept I Dept T

apportionment
Total wages Actual - - - - 5000
Rent Area (sq. ft.) 56000 48000 44000 36000 16000
 Depreciation Value of plant 7500 2500 - - -
Electricity Kilo watt hours 40000 25000 20000 10000 5000
Employee Number of 6000 6000 4000 2000 2000
welfare workers
General Direct wages 10500 10500 7000 3500 3500
expense
Repairs Value of plant 15000 5000 - - -
Stores Value of stock 4500 6000 3000 1500 -
overhead
Total 139500 103000 78000 53000 31500

5.7 Redistribution of Overheads or Apportionment of Service departments

overheads to Producing departments (Secondary Distribution)
Re-apportionment is the process of distributing service department overheads to the
manufacturing department. After overheads have been allocated and apportioned to the
production and service departments, the service department's total overheads should be
allocated to the cost center or production department.
The approach for re-allocating service department expenditures is similar to the method for
allocating overheads. The following are some of the most significant bases for allocating
service department costs to production departments:

Overhead Basis of apportionment

Repairs and maintenance Direct labor hours, or direct wages, or
Planning and progress machine hours
Tool room
Canteen and welfare Number of workers/employees
Hospital and dispensary
Inspection Inspection hours
Transportation department Tonnage handled, crane hours, truck hours,
truck mileage, truck-ton hours, number of
packages, etc.
Stores department Material requisitions, weight of materials,
etc.
Computer Computer hours
Time keeping Number of cards punched, or number of
workers.

As a result, service department costs are allocated based on the services provided and the
benefits received by beneficiary departments.

 Repeated Distribution Method

According to this method cost service department
should be apportioned to other service departments, production as well as service,
according to prefixed percentage. The process is repeated until the total costs of the service
departments are exhausted or the amount becomes too small or insignificant.
Illustration: Advita Ltd. has divided its production activities in five departments. The
manufacturing departments are department A, D, and V, while the service department is
department I and T.
The actual costs for a period are as follows:

Costs Amount (Rs.)

Rent of Factory 200000
Depreciation on plant 10000
Electricity 100000
Employee welfare expenses 20000
General Expense 35000
Repair and maintenance of plant 20000
Stores overhead 15000

Information related of various departments:

Particulars Dept A Dept D Dept V Dept I Dept T

No. of 15 15 10 5 5
workers
Total wages 15000 15000 10000 5000 5000
(Rs.)
Kilo watt 160 100 80 40 20
hours
Value of 1500 2000 1500 - -
stock (units)
Value of 15000 5000 - - -
Plant (Rs.)
Area (sq. ft.) 140 120 110 90 40

Expenses of the service departments I and T are apportioned as under:

Department A D V I T
I 30 40 20 - 10
T 10 20 50 20 -

Calculated the cost apportioned to each department and also show re-distribution of service
departments overhead to production departments.
Solution:

Primary Distribution of Overheads

 Particulars Basis of Dept A Dept D Dept V Dept I Dept T
apportionment
Total wages Actual - - - - 5000
Rent Area (sq. ft.) 56000 48000 44000 36000 16000
Depreciation Value of plant 7500 2500 - - -
Electricity Kilo watt hours 40000 25000 20000 10000 5000
Employee Number of 6000 6000 4000 2000 2000
welfare workers
General Direct wages 10500 10500 7000 3500 3500
expense
Repairs Value of plant 15000 5000 - - -
Stores Value of stock 4500 6000 4500 - -
overhead
Total 139500 103000 79500 51500 31500

Secondary Distribution of Overheads

Particulars Dept A Dept D Dept V Dept I Dept T

Total 139500 103000 78000 51500 31500
Overheads
Distribution 15450 20600 10300 (51500) 5150
Dept I (I)
overheads
Distribution 3150 6300 15750 6300 (31500)
Dept T (II)
overheads
Distribution 1890 2520 1260 (6300) 630
Dept I (III)
overheads
Distribution 578 1156 2890 1156 (5780)
Dept T (IV)
overheads
Distribution 347 433 230 (1156) 116
Dept I (V)
overheads
Distribution 12 23 58 23 (116)
Dept T (VI)
overheads
Distribution 7 9 5 (23) 2
Dept I (VII)
overheads
Distribution 0.2 0.4 1 0.4 (2)
Dept T (VII)
overheads
Distribution 0.12 0.16 .08 (0.4) .04
Dept I (VII)
 overheads

 Simultaneous Equation Method

This method involves solving simultaneous equations to determine the amount of overhead
for each production department. On the basis of records, the proportion of service benefits
received by different cost centers from a service cost center is calculated. In the equations
developed for apportionment of cost of service cost centers to production cost centers, the
same ratios are utilized as coefficients. The cost of service cost centers is determined by
solving the equations. Service cost centers' costs will be allocated to manufacturing cost
centers.
Illustration: By taking the above illustration-
Expenses of the service departments I and T are apportioned as under:
Department A D V I T
I 30 40 20 - 10
T 10 20 50 20 -

Solution:
Let I = Total expenses of service department ‘I’ to be apportioned
Let T = Total expenses of service department ‘T’ to be apportioned
We get equation:
I = 51500 + 0.2T
T = 31500 + 0.1I
So, I – 0.2T = 51500
(-)0.1 I + T = 31500
By multiplying equation 1 by 5 and equation 2 by 1
We get: 5I – T = 257500
(-)0.1I + T = 31500
By equating above equation,
IV.9 I = 289000
I = 289000/4.9 = 58979.59 or 58980
And T = 37400

Re-distribution of Service department overhead to Production Departments

 Particulars Dept A Dept D Dept V Dept I Dept T
Total 139500 103000 78000 51500 31500
Overheads
Distribution 17694 23592 11796 (58980) 5898
of Dept I
overheads
Distribution 3740 7479 18699 7480 (37398)
of Dept T
overheads

5.7 Production Overhead Absorption Rates

Overhead absorption is the process of charging all allocated and apportioned overheads to a
product or cost center.
The "allocation of overhead to cost units" is known as overhead absorption.
The basis for absorbing overheads is determined by the production process used in a certain
department. Overhead absorption can be achieved in a variety of ways.
The variable production overheads shall be absorbed to products or services based on
actual capacity utilization.
The fixed production overheads and other similar item of fixed costs such as quality control
cost shall be absorbed in the production cost on the basis of the normal capacity or actual
capacity utilization of the plant, whichever is higher.
Production Overheads absorption rate for each cost centre is to be determined with the
help of following formulas:
 Fixed overheads absorption rate =
Fixed Overheads/ Normal capacity or actual output produced (units), whichever is higher
 Variable Overhead absorption rate =
Variable Overheads/ Actual output produced (units)

5.8 Selection of Absorption Rate

The method of overhead absorption that should be used is determined by the production
process in use in a certain department. For example, if the manufacturing is labor intensive,
the labor hour rate approach may be the best option; similarly, if the production is entirely
machine-based, the machine hour rate method should be used.
Methods of Absorption of Production Overhead
 Direct Material Cost Rate: It is a percentage of overheads over direct material cost.
Overhead rate = Overhead expenses / Direct material cost

 Prime Cost Rate: It is a percentage of overheads over prime cost.

 Overhead rate in this method is calculated by dividing the factory overhead by the prime
cost.
 Direct Labour Hour Rate: This is a rate per hour and not a percentage rate. It is obtained
by dividing the total production overheads by the total number of direct labour hours
for the period.
Overhead rate = Factory overhead / Direct labor cost
 Machine Hour Rate: Where the production in the factory is purely based on machine
work, absorption rate will be adopted is machine hour rate. Machine hour rate is the
overhead cost of running a machine for one hour. This rate is obtained by dividing the
amount of factory overheads apportioned to a machine by the number of machine
hours for the period under consideration. Machine hour rate is obtained by dividing the
amount of factory overhead by the number of machine hours.
 Rate Per Unit of Output: This is the simply the total overheads of a department over
number of units produced.
 Normal rate or Actual Rate: This is the rate of overhead absorption which is calculated
by dividing actual overheads to be absorbed by actual quantity.
Normal rate = Actual overhead incurred/ Actual quantum of absorption base
 Predetermined Rate: This is the rate of overhead absorption which is calculated in
advance of expenses incurred. This is calculated by dividing the predetermined expenses
by predetermined quantity.
Pre-determined Rate = Budgeted overhead / Budgeted quantum of absorption base
 Blanket Overhead Rate: A single overhead absorption rate is known as the blanket
overhead rate that applies to the entire factory. It is a standard absorption rate that is
applied to all jobs and output units in a factory, regardless of the departments in which
they are created or processed.
Blanket Rate = Total Budgeted overhead/ Total quantum of estimated base
 Departmental Overhead Rate: The overhead rate for each department in a factory
manufacturing process is known as the departmental overhead rate. When different
departments perform particular actions to complete the process, the departmental
overhead rate varies at each stage of the manufacturing process.
Departmental overhead rate = (Total Budgeted or estimated overhead for each
department) / Departmental absorption base
Under Or Over Absorption of Overheads
Overhead costs can be fully absorbed using the Actual rate technique of absorption, which is
based on actual rates rather than predetermined rates. However, overhead is not entirely
absorbed in the case of predetermined rates. Overhead does not always correspond to
actual overhead incurred. Overhead absorption could be excessive or insufficient.

Over Absorption: When an overhead is over absorbed, it signifies that more overhead has
been absorbed than actually incurred.
Under Absorption: It means the amount of overhead absorbed is Less than actual overhead
incurred.
 Illustration: The Normal working of a factory is 40 hours per week. The factory operates on
10 machines and every week 5 hours per machine are spent on maintenance. The budgeted
annual overheads are Rs. 4,55,000. Number of working weeks during the year is 52.
The actual activity took 450 machine hours per week and incurred overhead cost of Rs.
12000.
Calculate: a) Overhead rate per machine hour
b) The amount of over or under absorption of overhead in respect of the 4-week period.

Solution:
 Machine hour worked = Working weeks x working hours per week x no of machine-
Normal idle time = 52 weeks x 40 hours x 10 - 10 x 5 x 52 = 20800 – 2600 = 18200 hrs
 Machine hour rate = Total estimated annual overhead / machine hour worked
= Rs. 455000/ 18200 = Rs. 25

 Over or under absorption of Overhead

Overhead incurred = Rs.12000 * 4 weeks = Rs. 48000
Overhead absorbed = 450 hours * 4 weeks * Rs. 25 = Rs. 45000
Under absorption = Budgeted overheads – Actual overheads incurred = Rs. 3000

5.9 Factory Overheads

Factory overheads are the sum of all indirect materials, labor, and other expenditures that
cannot be attributed to the products or services provided directly. Factory rent and rates,
property tax, power, oil, and gas expenses, factory lighting, insurance of factory premises,
equipment, and machinery, depreciation, stationery, telephone, and clerical salaries are
examples of factory overhead.
The steps in factory overhead costing are as follows:
I. Costs of factory overhead are collected.
II. Overheads are allocated to various cost centre.
III. Apportionment or distribution of overhead costs.
IV. Costs from the service department are re-distributed to the production department.
V. Overheads are absorbed using overhead absorption rate.

5.10 Conclusion
 Overheads comprise of indirect materials, indirect employee costs and indirect expenses
which are not directly identifiable or allocable to a cost object in an economically
feasible way. overheads particularly focus on the concept of direct and indirect expenses
which in turn depends on the traceability of the expenses with the product or service.
 Overheads = Indirect materials+ Indirect labour + Indirect expenses
 Any items of overheads arising out of abnormal situation in business activity should not
be treated as overheads. They are charged to Costing Profit and Loss Account.
 Items not related to business activities such as donation, loss / profit on sale of assets
etc are also not to be treated as overheads.
 Functionally, overheads are classified into Factory overheads, Office and Administrative
overheads, and Selling and Distribution overheads.
 Factory overhead is actually manufacturing overhead while other two are non-
manufacturing overhead.
 On the basis of behaviour, overheads can be classified as variable overhead, fixed
overhead and semi-variable overhead.
 Allocation refers to identification of overhead costs to the cost centre. But
apportionment refers to the distribution of overhead cost on some logical base when
identification to cost centre is not possible.
 There are common service cost centres in a multi-product environment that provide
services to the various production cost centres and other service cost centres. The costs
of services must be allocated to the appropriate cost centers. The first stage is to
allocate overheads to various cost centers, and the second is to allocate service cost
centers' costs to production cost centres on an equitable basis.
 Once the overheads are allocated and apportioned to a particular department, then cost
will be absorbed by the products produced in the department.
 In order to determine the absorption of overhead in costs of jobs, products or process, a
rate is calculated and it is called as Overhead Absorption Rate or Overhead Rate.

5.11 Glossary
 Overheads: Overheads are expenses that cannot be directly attributed to a specific
product or service. Simple terms, overheads are the total of all indirect costs.
 Fixed overheads: Fixed overheads are also known as period costs or capacity costs,
remain constant or fixed in total regardless of changes in production or sales levels.
 Variable Overheads: Variable overheads fluctuate proportionately with changes
in production and sales volume.
 Semi-Variable Overheads: These costs are made up of both fixed and variable charges.
They vary with volume due to the variable component, and they do not alter in direct
proportion to output due to the fixed component.
 Factory Overheads: Factory overheads, also known as production or works overheads or
manufacturing overheads, are the indirect costs of converting raw materials into
finished goods.
 Administration Overheads: Overheads are incurred in connection with the general
administration of the company.
 Selling and Distribution Overheads: Selling costs are costs incurred to generate demand,
attract potential buyers, and maintain existing customers. Overheads for managing
stockpiles and delivering items to customers are incurred as part of the distribution
process.
 Allocation: Allocation means charging overheads directly to specific departments.
 Apportionment: Apportionment of overhead is the equitable distribution of overheads
across many cost centers.
 Absorption of Overheads: Absorption refers to the process of recovering allocated cost to a
particular cost centre by the units produced in that cost centre.
 Overhead Rate: To determine the absorption of overhead in costs of jobs, products or
process, a rate is calculated and it is called as "Overhead Absorption Rate" or "Overhead
Rate."
 Over Absorption: Over absorbed means that the amount of overheads absorbed are
more than actual overhead incurred.
 Under Absorption: It means the amount of overhead absorbed is Less than actual
overhead incurred.

5.12 Self-Assessment Questions

1) What is the difference between allocation and apportionment of overheads?
2) Explain the methods of redistribution of overheads.
3) What is absorption? Explain under and over absorption of overheads.

5.13 Questions for discussion forum

1) Discuss why service department overheads are redistributed between production
departments.
2) Briefly discuss the methods of overhead absorption and its applicability in various
industries.

5.14 Case Study

Advita ltd. is a leading manufacturer of rubber gloves. The production process involves three
departments namely P, Q, and R and two service departments S, and T. The following is the
budget for the month of April:

Particulars Amount in Rs.

Direct material 100000
Direct labor cost 80000
Direct expenses 50000
Indirect wages 120000
Factory Rent 75000
Power and Electricity 110000
General lighting 25000
Sundry expenses 20000
Depreciation on machinery 30000
Repairs and maintenance 10000

Additional information:

Particulars Dept P Dept Q Dept R Dept S Dept T

Area (sq. m.) 2000 2500 3000 2000 500
Value of 60000 80000 100000 15000 10000
machinery
Machine hour 1000 2000 5000 1500 1000
Light points 10 15 20 5 5
 Horse power 60 30 50 10 5
Direct wages 25000 15000 20000 10000 10000
Number of 10 8 7
workers
(production)
Working hours 1600 1280 1120 - -

The service department overheads are redistributed between production department in

following percentage:

Department P Q R S T
S 20 30 40 10
T 40 20 30 10

 Show the allocation and apportionment of overheads between the departments.

 Show the re-apportionment of service department overheads to production
departments using simultaneous equation method.
 Compute the absorption overhead rate.

5.15 Multiple Choice Questions

1) Overheads are
a) the sum of all indirect expenditures
b) the sum of all direct expenditures
c) the sum of direct material and labor cost
d) the sum of direct and indirect material cost
Explanation: Overheads refer to the sum of all indirect expenditures.
2) Overheads are classified on the basis of:
a) Variability
b) Nature
c) Function
d) All the above
Explanation: Overheads may be classified on the basis of their nature, variability, and
function.
3) Distribution of overheads does not include:
a) Classification and Collection of Overheads
b) Allocation and Apportionment of Overheads
c) Computation of Overheads
d) Absorption of Overheads
Explanation: This distribution of overheads is divided into three parts: Classification and
Collection of Overheads, Allocation and Apportionment of Overheads, Redistribution of
Overheads, and Absorption of Overheads.
4) On the basis of variability, the overheads are classified into
a) Two categories
b) Three categories
c) Four categories
d) Five categories
Explanation: On the basis of variability, the overheads are classified into three categories:
Fixed, Variable, and Semi-Variable overheads.
5) __________ refers to the grouping of indirect expenses from books of account and
supporting/corroborative records.
a) Overhead allocation
b) Overhead collection
c) Overhead apportionment
d) Overhead distribution
Explanation: Overhead collection refers to the grouping of indirect expenses from books of
account and supporting/corroborative records into predefined categories based on their
nature and purpose.
6) Overheads are collected on the basis of pre-planned groupings known as
a) Overhead classification
b) Overhead collection
c) Overhead codification
d) Overhead cost pool
Explanation: Overheads are collected on the basis of pre-planned groupings known as Cost
pools.
7) Allocation means
a) means charging overheads directly to specific departments.
b) the equitable distribution of overheads across many cost centers.
c) the process of distributing service department overheads to the manufacturing
department.
d) the grouping of indirect expenses from books of account.
Explanation: Allocation means charging overheads directly to specific departments.
8) Rent of factory building is an example of
a) Variable overhead
b) Administration overhead
c) Factory overheads
d) Indirect labor cost
Explanation: Rent of factory building, depreciation on machines, etc. are examples of factory
overheads or production overheads.
9) Redistribution of service department overheads to production departments is also called
as
 a) Primary distribution
b) Secondary distribution
c) Allocation
d) Re-allocation
Explanation: Redistribution of service department overheads to production departments is
also called as Secondary distribution or re-apportionment of overheads.
10) Canteen and welfare expenses are apportionment on the basis of
a) Direct wages
b) Labor hours
c) Machine hours
d) Number of employees/workers
Explanation: Canteen and welfare expenses are apportionment on the basis of number of
workers.
11) Transportation department overheads are not apportioned on the basis of
a) Truck tonnage handled
b) Truck mileage
c) Truck kilometers
d) Truck-ton hours
Explanation: Transportation department overheads are apportioned on the basis of Tonnage
handled, crane hours, truck hours, truck mileage, truck-ton hours, number of packages, etc.
and not on kilometers.
12) Primary distribution of rent, rates, and taxes is based on
a) Number of workers
b) Area occupied
c) Machine hours
d) Volume of stock
Explanation: Primary distribution of rent, rates, and taxes is based on area occupied or floor
space.
13) Under ________, process is repeated until the total costs of the service departments are
exhausted or the amount becomes too small or insignificant.
a) Simultaneous equation method
b) Re-distribution
c) Repeated distribution method
d) Secondary distribution
Explanation: Under Repeated distribution method of redistribution, the process is repeated
until the total costs of the service departments are exhausted or the amount becomes too
small or insignificant.
14) The process of charging all allocated and apportioned overheads to a product or cost
center is known as
 a) Allocation
b) Absorption
c) Apportionment
d) Collection
Explanation: Overhead absorption is the process of charging all allocated and apportioned
overheads to a product or cost center.
15) Store requisitions, wage sheets, journal entries, and invoices for rent, insurance, and
other charges are all sources of:
a) Overhead distribution
b) Overhead apportionment
c) Overhead allocation
d) Overhead collection and codification
Explanation: Store requisitions, wage sheets, journal entries, and invoices for rent,
insurance, and other charges are all sources of overhead collection and codification.
16) The Variable production overheads and other similar item of costs shall be absorbed in
the production cost on the basis of:
a) Labor hours
b) Machine hours
c) Normal capacity
d) Actual capacity
Explanation: The variable production overheads shall be absorbed to products or services
based on actual capacity utilization.
17) If actual output is 2000 units and normal capacity is 1800 units, the fixed production
overheads and other similar item of fixed costs should be absorbed on the basis of:
a) Actual output = 2000 units
b) Normal output = 1800 units
c) Average output = 1900 units
d) Number of workers
Explanation: The fixed production overheads and other similar item of fixed costs such as
quality control cost shall be absorbed in the production cost on the basis of the normal
capacity or actual capacity utilization of the plant, whichever is higher.
18) It is a standard absorption rate that is applied to all jobs and output units in a factory,
regardless of the departments in which they are created or processed.
a) Direct material cost overhead rate
b) Departmental overhead rate
c) Blanket rate
d) Supplementary rate
Explanation: Blanket rate is a standard absorption rate that is applied to all jobs and output
units in a factory, regardless of the departments in which they are created or processed.
19) Non-manufacturing overheads include
a) Production overhead
b) Factory overhead
c) Manufacturing overhead
d) Administration overhead
Explanation: Factory overhead or production overhead is actually manufacturing overhead
while other two are non-manufacturing overhead.
20) Overhead is not entirely absorbed in the case of:
a) Actual rate
b) Pre-determined rate
c) Absorption rate
d) Overhead rate
Explanation: Overhead costs can be fully absorbed using the Actual rate but overhead is not
entirely absorbed in the case of predetermined rates.