Non-production overhead costs are never added to the value of inventory.

Related MCQs

• 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
• Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit, job or batch costs.
• Variable overhead is overhead that increases as more production work is done. Total variable overhead expenditure therefore depends on the volume of production. Variable overhead is usually calculated as an amount for each direct labour hour worked.
• Apportionment means sharing on a reasonable basis. Many overhead costs are costs that cannot be allocated directly to one cost centre, because they are shared by two or more cost centres. These costs are apportioned between the cost centres.
• 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.
• 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
• Overhead absorption is sometimes called overhead recovery.
• The relative sales value method is the most widely used method of apportioning joint costs because (ignoring the effect of further processing costs) it assumes that all products achieve the same profit margin.
• Overheads are usually added to cost units using a predetermined overhead absorption rate, which is calculated using figures from the budget.
• The over-absorbed overhead is accounted for as an adjustment to the profit in the period, and is added to profit in the cost accounting income statement.