Indirect production costs are incurred in three main ways: • Production activities: costs arising in production departments such as fuel, depreciation, supervision • Service activities: the cost of operating non-producing departments such as materials handling, canteen • Establishment costs: general production overheads such as factory rent/rates, heating and lighting

Related MCQs

• . Production Overheads are costs related to the production process other than direct labour and materials. They are also known as factory overheads since they are incurred inside the factory, other overheads such as selling and administrative overheads are always charged to in the period in which they are incurred
• Which of the following procedure is incorrect for attributing overhead costs to cost units? I. Collecting production overhead costs by item II. Establishing cost centres III. Allocating and apportioning overhead costs to cost centres IV. Apportioning service cost centre costs to production cost centres V. Absorbing production cost centre costs into cost units
• Production overheads represent indirect materials, indirect wages and indirect expenses attributable to:
• Production overheads are the overhead costs of both the production departments and the service departments.
• The apportionment of production overhead costs might be in two stages: • sharing (or dividing) general costs between production centres and service centres; and • then sharing the costs of the service centres between the production centres.
• When there is opening work in progress there are two types of cost on the debit side of the account. These are the costs that were incurred last period and brought forward as work in progress and the costs that were incurred in the current period.
• Allocation is where overheads are allocated to cost centres. If a cost centre is responsible for the entire cost of an item of expenditure, the entire cost is charged directly to the cost centre.
• A situation may arise where both service departments do work for the other service department, as well as the production departments. The secondary apportionment is more complex. The process is called reciprocal apportionment
• It is possible to add non-production overheads to the full production cost of units produced and sold (i.e. No cost will be carried forward to the next period in the form of closing stock), to obtain a full cost of sale.
• Administration overheads and sales and distribution overheads are not absorbed into product costs. Instead, they are treated in full as an expense in the financial period to which they relate.