Overheads - fixed or not ?!?!

Laura M

I'm currently working on my Costs and Revenues unit and the exam is on Tuesday. I understand that AAT have changed the way the overheads are treated. They are now going to remain fixed so that variances will then show in the budget variance analysis.

However, is this the case for the batch costing. I know you flex the direct labour and materials to the units produced but I thought the overheads stayed the same. The books, however, are showing that they are also flexed with the units produced but is this what AAT has changed as well? I'm now getting confused on whether I should be fixing them as per the budget variance or not.

Please could someone advise?

Thank you.

guinea pig

Hi Laura,
Go to Osborne Books/resources/AAT QCF/level 3 costs & revenues tutorial/note regarding flexed budgets, where they give an explanation.
In the exam they should tell you how to treat the fixed overheads.
Good luck - I took this exam on Thursday (and passed fortunately)
GP

Laura M

Hi GP, thank you for coming back to me. I'm afraid I've already seen this note but it only relates to the budget variances.

There hasn't been a note regarding the overheads within the batch costing. I'm trying to find out if these are treated the same as the budget overheads or are they flexed as per the direct labour and materials.

Jo Clark

Hi Laura

I think that you'll need to read the actual question. I'm going to check my CRS books and notes but from what I can recall I am sure the question advises how to deal with these. I'll post again once I have looked through my notes etc.

Do you have a question that you are currently working on? What books are you using?

Laura M

Hi

No, there's no particular question I'm working on but I'm on the Osborne and BPP Question Bank books. I know the answers in the back of the book say to flex the overheads as per the no. of units produced but I understood from AAT's recent announcements that this was no longer the case and that the overheads had to remain fixed. I wasn't sure if this was just for the budget variances though or was for the batch costing as well.

Jo Clark

Hello Laura

From a quick look at my books/notes it does appear that you are advised how to deal with the overheads (as per Guinea Pig's message). Make sure you are comfortable with the high/low calculation just in case you need to perform it.

All the best.

JC

Jo Clark

Hello Laura

Just a quick thought... have you looked at the practice CBA on the AAT website?

I've had a quick look and the questions do appear to advise how the overheads should be dealt with Task 2.1/2.4... again remember you need to know high-low.

Hope this helps.

JC

Laura M

Hiya

Yes, done the practise assessment. I'm fine with High-Low . . that's the semi-variable costs. I'm talking about the overheads on the batch costing.

Thanks

sdv

Laura M wrote: »

Hi GP, thank you for coming back to me. I'm afraid I've already seen this note but it only relates to the budget variances.

There hasn't been a note regarding the overheads within the batch costing. I'm trying to find out if these are treated the same as the budget overheads or are they flexed as per the direct labour and materials.

The overheads in the process costing/batch costing is recovered on absorption basis.

The overheads are estimated at the begining of the period and so is the absorption rate based on the estimated activity (Units, L/hours,or M/Hrs)

There is no question of flexing the overheads in process costing,

hope this helps

SandyHood

There are two versions of one of the questions in the sample assessment.
If you look at one version and then the answer to the other version (one of my students did!), you might think that there needs to be a change to a fixed overhead amount based on just increasing the volume produced.

The truth is that fixed overheads (by definition) - are not fixed. I know it is a contradiction with day-to-day language. But when we say fixed we mean that they do not change in direct proportion to the volume produced. So when the landlord puts up the rent because of other reasons, the fixed cost increases - but it is still a fixed cost.

The AAT sample question I am refering to has a line under the table (in the final version) where it says that a fixed cost will increase if output is over a particular level (i.e. it is a stepped cost)

So don't flex fixed overheads, but do recognise where there are steps.

guinea pig

Good luck tomorrow, just remember, read the questions slowly, and carefully, then read again. I found several of the questions were awkwardly worded, I had got so used to approaching a situation in the same way,from the practice questions, that when the questions were presented differently, I had to stop and think more! Also, I found the scrolling up and down to see some of the figures a pain.

Laura M

SandyHood wrote: »

There are two versions of one of the questions in the sample assessment.
If you look at one version and then the answer to the other version (one of my students did!), you might think that there needs to be a change to a fixed overhead amount based on just increasing the volume produced.

The truth is that fixed overheads (by definition) - are not fixed. I know it is a contradiction with day-to-day language. But when we say fixed we mean that they do not change in direct proportion to the volume produced. So when the landlord puts up the rent because of other reasons, the fixed cost increases - but it is still a fixed cost.

The AAT sample question I am refering to has a line under the table (in the final version) where it says that a fixed cost will increase if output is over a particular level (i.e. it is a stepped cost)

So don't flex fixed overheads, but do recognise where there are steps.

That's brilliant, thank you . . it was just the answer I was looking for. Thank you.

stephleedz

Hi,

Hope you are all well? I have just read this thread and was also hoping for some advice. Can you remember what sort of questions appeared on you cost and revenue exam...was it anything like the AAT Mock exam?


Steph