08 Overheads And Absorption Costing

CH8 OVERHEADS AND ABSORPTION COSTING Absorption costing is a method of accounting for overheads. It is basically a method of sharing out overheads incurred amongst units produced.

1.OVERHEADS制造费用 Overheads is the cost incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and in full to the product, service or department. Overhead is actually the total of the following: Indirect materials Indirect labor Indirect expenses The total of these indirect costs is usually split into the following: Production overhead Administration overhead Selling and distribution overhead In cost accounting there are two methods of dealing with overheads: Absorption costing Marginal costing

2. THE OBJECTIVE OF ABSORPTION COSTING The objective of absorption costing is to include in the total cost of a product an appropriate share of the organization’s total overhead. An appropriate share is generally taken to mean an amount which reflects the amount of time and effort that has gone into producing a unit or completing a job. Absorption costing is a method for sharing overheads between different products on a fair basis. Overhead cost sharing: why? Knowledge of the costs of different end products or services may be useful to a business: in providing information on their relative costs and efficiencies,. which enables costs to be examined and challenged; in the valuation of stocks of work-in-progress and finished goods; in setting selling prices in industries where cost plus applies, or in providing a guide to the selling prices that are required for a business to make a profit; in establishing the profitability of each product/service, which may be useful both for operational （tactical） and longer term （strategic） planning. For a complete cost picture, all overheads have to be shared out. The process of sharing out overhead costs, along with the attribution of direct costs, to end products/services is termed absorption costing. If nothing else, a manufacturing business has to share out production overhead costs in order to establish stock values. A service industry business is not so obliged to share out overheads but would not obtain any of the other benefits listed above without doing so. Further benefits arise from the better control of costs that should be enabled at cost centre （as well as at cost unit） level. So much for the whys. What about the wherefores? How is the cost sharing to be done?

3.OVERHEAD COST SHARING PROCESS: PRINCIPLES Overhead costs should be shared: as fairly as possible over the different cost centers and cost units that use the particular resource（s） in question; in a way that is administratively feasible; and such that the benefits derived from having, and from using, the information are expected to exceed the costs of its provision.

4. OVERHEAD COST SHARING PROCESS: THE SIMPLE

APPROACH Production （manufacturing） overheads are a favorite focus of study materials and examination questions. At its simplest, the total production overheads(大多数情况下研究production overheads) incurred in a factory for a period could be shared amongst all the products manufactured in that period on a common basis e.g. on the basis of direct labor hours worked （i.e., if Product A has had, for example, twice as many labor hours worked on it in comparison with Product B then it would attract twice as much overhead）. Several questions arise regarding such an approach to overhead cost sharing: (1) it could be suggested that cost centers （separate, clearly identifiable activities, ideally with specific person responsibility） be established within the factory. The establishment of appropriate cost centers should facilitate cost control whilst at the same time improve the accuracy of cost sharing; (2)it is unlikely that a single basis （e.g., direct labor hours） best differentiates the overhead cost incurrence between products, for all cost elements or for all cost centers; (3) the establishment of predetermined overhead rates （based upon expected costs and activity）, rather than rates based upon the sharing of actuals, provides more immediate information and avoids fluctuations in unit costs potentially caused by unevenness in the pattern of overhead expenditure and/or production activity. It is preferable, therefore, to set up several cost centers, and to establish for each both a fair share of overhead costs and the best way of attaching such costs to the end products, based upon expected costs and activity. Cost center, within a factory, will comprise both production cost centers （separable activities concerned only with stages in the manufacture of a product, e.g., a finishing process） and service cost centers （separable activities within a manufacturing unit which provide a service to production activities and to each other, e.g., materials storage, canteen, machine maintenance）.