Accounting Assignment: Overhead Rates, Budgeting, and Cost Analysis

This assignment provides comprehensive answers to key cost accounting questions. It explores the use of predetermined overhead rates, explaining their benefits over actual costs. It defines and differentiates between under and over applied overhead, detailing their disposition at period-end. The assignment also covers the break-even point, absorption versus variable costing, and the segment margin. Furthermore, it contrasts activity-based costing with traditional methods, discusses budgeting and budgetary control, and explains responsibility accounting. Finally, it defines flexible budgets, incremental, opportunity, and sunk costs, providing a thorough overview of essential accounting concepts.

1Why do companies use predetermined overhead rates rather than actual manufacturing
overhead costs to apply overhead to jobs?
The company’s uses predetermined overhead rates rather than actual manufacturing overhead
costs to apply overhead to jobs due to following reasons;
1) Management needs the overhead rate before the year ends and the management applies
the predetermined overhead rate to the jobs to know how well they are performing.
2) Second reason for using the predetermined overhead rate is to take into consideration all
the abnormal factors such as seasonal which are related to a job.
2- What is under applied overhead and over applied overhead? What disposition is made
of these amounts at the end of the period?
The difference between overhead incurred and overhead absorbed for a given period is known as
under applied overhead or over applied overhead.
If the overhead absorbed is less than overhead incurred it is known as under absorption of
overhead. Whereas if the overhead absorption is more than overhead incurred it is known as
overhead incurred.
These amounts are treated as period cost adjustments.
The costs are adjusted periodically in the statement of inventory with closing inventory.
3- What is meant by the term break-even point?
Breakeven point may be defined as a point at which company incurs no profit no loss.
It may be calculated by the formula:-
Breakeven point in units = Fixed cost/ contribution margin per unit
Breakeven point in dollars = Fixed cost/ contribution margin ratio
It helps the company to determine the point at which company is operating its business at par.
Beyond this point company will incur loss in carrying its operational activity. Thus it is the
safety point for the company beyond which the company is at risk.

4- What is the basic difference between absorption costing and variable costing?
Absorption costing may be defined as a costing technique which uses both fixed as well as
variable costing to determine the product cost. In other words burden of fixed as well as variable
cost is imposed on a particular product. Total product cost absorbs both fixed as well as variable
cost.
Variable cost may be defined as a costing technique which uses only variable cost to determine
the product cost. In other words burden of variable cost is only imposed on a particular product.
Product cost absorbs only variable cost. It changes with the change in the level of production
capacity.
5- Explain how the segment margin differs from the contribution margin.
Contribution margin may be defined as excess of sales over variable cost. It is calculated for the
company as a whole to know whether the company is able to realize its variable costs or not.
Variable costs are costs which are incurred with the change in the level of activity. These costs
change with the change in each level of production.
Segment margin on the other hand May be defined as a margin incurred through earning a
particular segment of business activity some segments may be able to earn huge profits while
other may not. Thus it is possible that company might incur loss while operating a particular
segment whereas while calculating it in totality company may be in profit.
6- In what fundamental ways does activity-based costing differ from traditional costing
methods such as job-order costing?
1) Under activity based costing overheads are related to activities and grouped into activity
pools whereas under traditional costing overheads are related to cost center or
department.
2) Under ABC a costing cost driver are determined and under traditional costing time is
assumed to be the only cost driver governing cost in all department.
3) Under ABC costing there is no concept of single overhead recovery rate whereas under
traditional costing multiple or single overhead rate nay be used for absorption of
overheads.
4) Under ABC costing costs are assigned to cost objects whereas under traditional costing
costs are assigned to cost units

7- What is a budget? What is budgetary control?
Budget may be defined as a quantitative expression of a plan for a defined period of time. It may
include cost revenue expenses assets and liabilities
Budget control may be defined as a continuous monitoring of actual results versus budget either
to secure by an individual action or to provide a basis for budget revision. Budget is prepared
half yearly, monthly, quarterly or yearly as per the need and size of business organization.
Budgets are helpful in authorizing expenditure communicating objectives and plans controlling
operations coordinating activities.
8 What is meant by the term responsibility accounting?
Responsibility accounting is an accounting in which a manager is held responsible for those
revenues and costs which he can control significantly. Under this accounting manager cannot be
held responsible for those revenues and costs which are beyond his control. He can be held
responsible for any difference between actual and budgeted costs and revenues which he can
control significantly.
9- What is a flexible budget and how does it differ from a static planning budget?
Flexible budget may be defined as a budget prepared to account for the changes in level of
activity attained. It recognizes the difference between fixed variable and semi variable cost. For
example, industries are influenced by change in fashion and change in products and designs.
Static planning budget may be defined as a budget which is concerned with long term budget
action plan to attain organizational objectives and taking into consideration fixed changes in cost
10- Define the following terms: incremental cost, opportunity cost, and sunk cost.
Incremental cost may be defined as an extra cost which incurs with alternative course of action.
In other words the cost which company has to incur extra due to the choice of alternative course
of action is called as incremental cost.
Opportunity cost may be defined as cost incurred due to next best alternative or opportunity
foregone. The benefit foregone due to the next best alternate is known as opportunity cost.
Sunk cost may be defined as a cost which has been incurred sometimes in past. The cost which
has been incurred in past and has no relevance in future decision making is known as sunk cost.