Management Accounting: Accounting for Overheads and Labour

Vocabulary flashcards covering overhead allocation, apportionment, reapportionment methods, predetermined absorption rates, labour turnover, and wages accounting based on lecture notes.

Direct Method of Service Cost Reapportionment

A service cost reapportionment method where overhead costs are reapportioned directly to production cost centres without any reapportionment between service cost centres. If the direct method is used, the order in which service cost centre overheads are reapportioned is irrelevant.

Step Down Method of Service Cost Reapportionment

A service cost reapportionment method that results in costs being reapportioned sequentially between service cost centres as well as production cost centres. When using this method, the order in which service cost centre overheads are reapportioned is relevant.

Machine Hour Overhead Absorption Rate

A predetermined rate used to absorb production overheads based on machine activity, calculated using the formula $\text{Absorption Rate} = \frac{\text{Budgeted Overheads}}{\text{Budgeted Machine Hours}}$. For budgeted overheads of \text{\\n$690,480} and $15,344\,\text{budgeted machine hours}$, the rate is \\n$45\,\text{per machine hour}.

Predetermined Overhead Absorption Rate

An estimated overhead absorption rate set prior to a period. Using a predetermined rate avoids fluctuations in unit costs caused by abnormally high or low overhead expenditure or activity levels, and offers the administrative convenience of recording full production costs sooner.

Production Overhead Absorption Basis Selection

The choice of absorption base (such as direct labour hours or machine hours) determined by the predominant operational feature of a department. Departments with higher direct labour hours absorb overheads on a direct labour basis, whereas machine-intensive departments absorb overheads per machine hour.

Reciprocal Service Arrangements

An overhead scenario where service cost centres perform work for each other. Reapportionment requires a method that fully recognises these mutual service provisions before final reallocation to production cost centres.

Overhead Under Absorption

The condition occurring when actual overhead expenditure incurred exceeds the overhead absorbed into production during a period. For example, if budgeted overhead of \\n$150,000 for $60,000\,\text{hours}$ yields an OAR of \\n$2.50\,\text{per hour}, and actual overhead expenditure of \\n$150,000 is incurred with $55,000\,\text{actual machine hours}$ worked (\\n$137,500 absorbed), overhead is under absorbed by \\n$12,500.

Overhead Over Absorption

The condition occurring when total overhead absorbed into production based on activity levels exceeds actual overhead expenditure incurred during the period. The resulting excess absorption is credited to the statement of profit or loss.

Work in Progress Account (Direct Wages Entry)

An accounting account debited with basic pay for direct production workers (e.g., \\n$70,800) when accounting for wages costs, reflecting direct labour cost incurred on production jobs.

Overhead Control Account (Indirect Wages Entry)

An accounting account debited with non-job-specific wage elements such as overtime premium (e.g., \\n$2,000) and holiday pay (e.g., \\n$500), representing indirect labour costs.

Labour Turnover Rate

A measure of employee departures relative to workforce size during a period, calculated as $\text{Labour Turnover Rate} = \frac{\text{Number of leavers}}{\text{Average number of employees}} \times 100\%$. For $15\,\text{employees}$ leaving out of an average workforce of $25\,\text{employees}$, the rate is $60.0\%$.

Group Bonus Scheme

An incentive payment structure where a group performance bonus (calculated from time saved against standard time allowed) is distributed among team members according to fixed percentage allocations.

Production Overhead Control Account

A ledger account recording actual overhead expenses incurred on the debit side (e.g., indirect materials of \\n$22,800 from stores control and indirect wages of \\n$180,400 from wages control) and overhead absorbed on the credit side (transferred to work in progress), with over-absorbed balances credited to profit or loss.

Overhead Allocation

The direct assignment of a whole item of overhead cost to a specific cost centre or department without division.

Budgeted Hours Calculation from OAR

The determination of budgeted hours using total budgeted overhead expenditure and the predetermined absorption rate, formulated as $\text{Budgeted Hours} = \frac{\text{Budgeted Overheads}}{\text{OAR}}$. For budgeted overheads of \\n$475,200 and an OAR of \\n$32\,\text{per hour}, the budgeted hours are $14,850\,\text{hours}$.

Fixed Production Overhead Incurred Calculation

The calculation of actual fixed overhead expenditure incurred based on absorbed overheads and over-absorption: $\text{Actual Fixed Overheads} = \text{Absorbed Overheads} - \text{Over-absorbed Amount}$. With $4,500\,\text{units}$ produced at an OAR of \\n$8\,\text{per unit} (\\n$36,000 absorbed) and \\n$6,000 over-absorbed, actual incurred overhead is \\n$30,000.