Budgeting Accounting Treatment

sscors

Could someone help with this question please. The question asked for the costs to be matched to their appropiate accounting treatment: I am not sure of the reasons for the answers

Ingredients wastage in the production process- Direct cost

Holiday pay for production workers- Production in a labour overhead rate

Depreciation of equipment located in the materials store- production in a machine hour overhead rate
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Basic pay for production workers- Direct cost

SandyHood

You need to understand what direct costs are and that indirect production costs are production overheads.

Direct costs are attributable to specific products. If you make an apple pie, your recipe may say you need 4 apples.
You buy the apples, peel and core them, chop them up and (along with the pastry) make the pie. So the direct costs will include the apples, your time, and the pastry.

Ingredients wastage in the production process- Direct cost would be things like the apple peel - part of one of the costs directly attributable to making the apple pie.

Holiday pay for production workers- Production in a labour overhead rate Production workers are paid when they have holidays. The time spent on holiday is not part of making an apple pie, it is a cost that is essential for production but not direct. It is a production overhead cost. How any overhead is absorbed is company policy, but as holiday pay is proportionate to the labour used to make the apple pies, then absorbing as part of a labour overhead rate will build the holiday pay into the product cost.

Depreciation of equipment located in the materials store- production in a machine hour overhead rate
If you go back to your level 3 cost and revenues studies you will (hopefully) recall that equipment depreciation is typically either allocated or approtioned based on equipment value. The value of equipment depreciation for a material store would then be included as part of the total material store overhead and re-apportioned across the production departments based on material requestions or another proxy for the time each production department used out of the total time taken by the material store. Each production department would then absorb the total budgeted overhead in each according to whether it is a labour or machine intensive department.

Basic pay for production workers- Direct costWork at the basic hourly rate on direct tasks would be direct labour cost.

sscors

Hi

do you know why:

Redecoration of sales showroom should be allocated to marketing overhead

Cost of purchasing dept should be allocated to activity based charge to production cost centres

SandyHood

Redecoration of sales showroom should be allocated to marketing overhead

The sales showroom is part of the marketing department. Any money spent on redecorating would be an overhead cost.

Cost of purchasing dept should be allocated to activity based charge to production cost centres

Rather like the earlier answers, there is an element of company policy here. In a traditional overhead analysis the cost of the purchasing is treated as a service centre cost and then re-apportioned to the production cost centres, typically on the basis of how much each department uses the purchasing department (e.g. number of orders)