Management Accounting: Overhead Allocation and Cost Computation

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

1MANAGEMENT ACCOUNTING
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................3
Answer to question 3:.................................................................................................................4
Answer to question 4:.................................................................................................................5
Answer to question 5:.................................................................................................................7
Answer to question 6:.................................................................................................................8
References and bibliography:...................................................................................................10

2MANAGEMENT ACCOUNTING
Answer to question 1:
Production of any goods or rendering of any service require certain inputs. All the
costs related to the prime input factors constitute the prime cost of the product or services. In
other words, all the direct expenses are the part of prime costs and all the indirect expenses
are collectively called overhead. Therefore, indirect materials used in production, indirect
labour incurred in relation to the production or manufacturing of goods and any other indirect
expenses are collectively called manufacturing overhead. In the same way, indirect materials
indirect labour and indirect expenses related to selling and distribution of goods are known as
selling and distribution overhead. Similarly all the period expenses related to the office and
administration are known as office and administrative overhead (Anderson and Dekker
2014).
Overhead expenses are those expenses which cannot be directly linked with the
production unit and hence, it needs to be allocated or absorbed to the production unit using
certain appropriate basis. The system of allocation of overhead to the production unit is called
the overhead allocation or overhead absorption. There are various methods of overhead
allocation or overhead absorption. The traditional method of overhead allocation uses a single
base for allocation of all the overhead expenses and that is why it is called the volume based
overhead allocation system (Kaplan and Atkinson 2015). There are various disadvantages of
overhead allocation using a single base which makes it an unscientific and inappropriate
method of overhead allocation in the modern revolutionary business era. In this system, a
predetermined overhead rate is computed based on the estimated total overhead and total use
of a single activity. Using that rate all the overhead is allocated to the production units
(Kamal 2015).

3MANAGEMENT ACCOUNTING
Based on the information given in the case study of Voltus, and using the traditional
or volume based overhead allocation system, the predetermined overhead rate can be
computed as follows.
In the given case study, total estimated overhead for the period is $3,000,000 and
estimated use of total machine hour is 80,000 hours. The predetermined overhead rate or the
plant wide overhead rate is computed dividing the total estimated overhead by the estimated
use of total machine hours. Using the traditional or volume based overhead allocation system
the predetermined overhead rate can be computed as $45 per machine hours.
Applying the same overhead rate, the manufacturing overhead that would have been
applied to the jobs completed within the period from 1 July 2018 to 31 May 2019 can be
computed as follows.
Total machine hours used during the period from 1 July 2018 to 31 May 2019 is
70,000 hours and multiplying the predetermined overhead allocation rate with the machine
hours used in that period, the total overhead expenses that would have been applied to the
jobs completed within the period can be computed to $3,285,000.
Answer to question 2:
In the same way, total overhead that would have been applied to the jobs for the
period from 1 June 2019 to 30 June 2019 can be computed as follows.