O'head Analysis

System

Hi,

I'm just going over the mock for Unit 6 and noticed that I failed the o'head analysis question because I included the Direct Material & Direct Labour Costs in my analysis. I can normally do these questions perfectly but am having a totally ditzy moment here...why shouldn't the direct costs be included?

Thanks!

System

Re:O'head Analysis

The short and simple answer is because they are "Direct costs" and they are treated as "cost of sales" in the "trading account."

Overheads are general expenses put through the "p & l" account.

Regards

Dean

System

Re:O'head Analysis

If you think about why you have to do all that messing about with overheads then it should be clear.

Overheads cannot be directly attributed to a cost unit, therefore we have to have some way of fairly apportioning those costs for inclusion when costing each unit. That's what we're doing when we do all that allocating, apportionment and working out overhead absorption rates.

Direct costs can be directly attributed (that's why they're direct costs). There's no reason to include them in the overhead analysis, it would make things more complicated than they should be and you're messing around with figures that don't need to be messed around with.

Chris

System

Re:O'head Analysis

Thanks, that totally makes sense now! I've never had a question which included the Direct Costs before so just included them without thinking.

System

Re:O'head Analysis

Our tutor hammered it in to us that direct costs shouldn't be included in overheads. Those who still got it wrong in a past paper (not me - smug git) got a right old telling off.

Chris

System

Re:O'head Analysis

I'll definately remember from now on!!