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Dear John Sir,
BPP Revision kit question 8.11 has a question as follows
Which of the following is correct when considering the allocation, apportionment and reapportionment of overheads in an absorption costing situation?
The correct answer is “Only” Production related costs should be considered.
I didnt get this question and answer quite as much. What about the other costs like service department costs etc. and what costs are exclusively kept in exception
Thanks
AmitI do not have the BPP Kit. However, they are correct when they say that only production related costs should be considered.
Service departments costs are relevant but only is they are related to production.
(So, a department doing repairs in the factory would be relevant because it is related to the production; however, a department involved in delivering to customers would not be relevant because it is not related to production.)Dear John Sir,
Thanks a lot for this clarification however this brings me to another doubt.
The steps mentioned for coming to Overhead Absorption Rate ( OAR) is
Step 1 : Estimate the Overheads likely to be incurred during coming period
Step 2 : Estimate the activity levelI have 2 doubts
1) Now in step 1 do they mean only Production overheads or all overheads including Admin and Selling and Distribution Overheads as well ( The doubt since in the example given after these steps in BPP they state ” The Budgeted PRODUCTION OVERHEAD WAS”..
2) If the answer to doubt 1 is “Only Production Overhead” – Then since the ultimate saleable items are our units, if we don’t factor in Admin and S&D Overheads, isnt the OAR understated to that extent and wouldn’t it lead us to under pricing our product to not recover complete costs.
Thanks Again
AmitIt really depends on what the question says.
Usually (and unless you are specifically told different in the question) then we only absorb the production overheads because inventories will only be valued at the cost of production.
(If we are then trying to decide on a selling price then we would need to consider non-production costs, but this is not really until F5)
Dear John Sir,
Thanks again for the clarification. Take care and may God bless you and your family.
Best Regards
Amit
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