Overheads and Cost Sheet / Statement of Cost
Domain focus
Overheads and the cost sheet are the bridge from cost classification to cost ascertainment. The exam tests allocation, apportionment, absorption, over/under absorption and the cost sheet format.
Core rules
- Allocation assigns a whole overhead to one cost centre; apportionment divides a common overhead on a fair basis (floor area, machine hours, labour hours, horsepower).
- Reapportionment transfers service department costs to production departments; ignore reciprocal services unless the question requires repeated distribution or simultaneous equations.
- Absorption rate = budgeted overhead ÷ budgeted base. Bases include labour hours, machine hours, units and direct wages.
- Absorbed overhead = actual base × predetermined rate. Under-absorption = actual overhead > absorbed; over-absorption = absorbed > actual.
- Cost sheet: prime cost + factory overhead = works cost; + administration = cost of production; + selling/distribution = cost of sales; + profit = sales.
Worked example
Budgeted factory overhead ₹90,000; budgeted machine hours 15,000. Rate = 90,000÷15,000 = ₹6 per machine hour. Actual overhead ₹88,000; actual hours 14,000. Absorbed = 14,000×6 = ₹84,000. Under-absorbed = 88,000−84,000 = ₹4,000. The cost sheet would carry ₹84,000 into works cost, with ₹4,000 charged as an adjustment.
Traps
Do not use actual hours to set the rate before the period; do not add administration overhead to works cost; do not reverse the under/over sign; service department costs must leave the service department.