ECR - overheads query

twinmeister
twinmeister Well-KnownRegistered Posts: 122
Could anyone give me a real life example of:
a) variable production overhead
b) fixed production overhead
c) variable non-production overhead
d) fixed non-production overhead

Many thanks.

Comments

  • definite.studies
    definite.studies Feels At Home Registered Posts: 88
    I suppose different companies could decide to handle costs in different ways, depending on how significant they were and the overhead usage patterns of different products. I thought of the following items.

    a) Variable Production O/H: Usage-dependent machine servicing, and replacement of worn parts. Perhaps electricity used by machinery, if this is measured separately.

    b) Fixed Production O/H: Factory rent & rates.

    c) Variable Non-Production O/H: Delivery van fuel consumption perhaps. This might be allocated based on the number of deliveries of different products if the information was available.

    d) Fixed Non-Production O/H: Office rent & rates.

    Although, when I did the ECR 2 years ago I'm sure we didn't need to know about variable overheads.

    Hope this helps! :001_smile:
  • twinmeister
    twinmeister Well-Known Registered Posts: 122
    ECR - Overheads query

    Just getting confused about profit statements using marginal and absorption costing, so I wanted have a clear idea of what would be classed as variable overhead (and therefore included in marginal costing?) and a fixed overhead (and therefore the extra bit included in absorption costing?)

    Have I understood marginal and absorption costing correctly?

    Many thanks.
  • definite.studies
    definite.studies Feels At Home Registered Posts: 88
    When they talk about "variable costs", this means a cost that scales up in proportion to the level of production. Costs like electricity or gas may be treated as semi-variable because they contain both a fixed part and a variable part which can be directly related to the level of output.

    If you are not told how a cost increases with output level then you are obliged to treat it as a fixed cost.
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