Seminar 5 - Cost Terms & Allocation of Overheads

Which of the following is NOT a variable cost?

• Direct material

• Direct labour

• Sales commission

• Rental of office

Answer explanation

Direct material, Direct labour and sales commission are all variable costs as they will change in proportion to changes in production/sales volume.

Only rental cost is a fixed cost as it remains unchanged when activity changes.

Why biz use pre-determined OH rates to apply to products?

• Actual overhead rate is easily available thru the year.

• Overheads usually incurred uniformly during the year.

• Predetermined rate makes it able to estimate costs sooner.

• This is an easier way to do costing.

Answer explanation

As overheads does not incur uniformly during the year, and actual overhead rate might vary from month to month.

Using predetermined overhead rates make it possible to estimate job cost sooner.

Co. allocates OH based on Direct Labour hrs. Given OH costs $520k, labour hrs 120k, labour costs $460k, machine hrs 168k, compute the predetermined OH rate.

• $4.33/DLHR

• 113% of DL dollars

• $3.09/MHR

Answer explanation

Overhead costs allocate based on Direct Labour hours:

$520,000/120,000 hours = $4.33 per DLHR

Which of the following cost flows is TRUE?

• Open WIP + DM – End WIP = Cost of Goods Manufactured

• Open WIP + DM – End WIP = Cost of Goods Sold

• Open WIP + Manufacturing Cost – End WIP = Cost of Goods Manufactured

• Open WIP + Manufacturing Cost – End WIP = Cost of Goods Sold

Answer explanation

Open WIP + Manufacturing Cost – End WIP = Cost of Goods Manufactured

Under the responsibility accounting system, a manager will be evaluated based on:

• job title

• pay grade

• controllable items

• working hours

Answer explanation

Under the Responsibility Accounting System, the manager will be evaluated based on his ability to manage the controllable cost.