Chapter 7

A closer look at
overhead costs

7­
Copyright ª 2006 McGraw­Hill Australia Pty Ltd
1
What are overhead costs?
• For product costing, these are indirect product
costs
• For responsibility costing, these are the indirect
costs of responsibility areas
• Manufacturing overhead costs
– All manufacturing costs other than direct material and
direct labour

continued
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e 7-2
Slides prepared by Kim Langfield-Smith
What are overhead costs?
• Incurred for a variety of products that cannot be
traced to individual products
• Can be traced to individual product but not worth
the trouble
• Can be traced to individual products but it’s more
appropriate to treat this cost as a cost of all output
• Includes depreciation, factory insurance, factory
electricity costs, cost of manufacturing support
departments, indirect materials, indirect labour
• Non-manufacturing costs are all costs incurred
outside of manufacturing

Copyright 2006 McGraw-Hill Australia Pty Ltd

PPTs t/a Management Accounting: Information for managing and creating value 4e 7-3
Slides prepared by Kim Langfield-Smith
Allocating indirect costs: some general
principles
• Using cost pools
– Cost assignment can take two forms
 Direct costs can be traced directly to products
 Indirect costs cannot be traced to cost objects; therefore,
they need to be allocated
– A cost pool is a collection of costs that are to be allocated
to cost objects
 Have a common allocation base
 Often used to simplify the allocation process

continued
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e 7-4
Slides prepared by Kim Langfield-Smith
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e 7-5
Slides prepared by Kim Langfield-Smith