Question

Q5. A business has fixed costs of $200 000, sells its products for $25 each and has variable costs of $10 each. Draw a CVP graph and show the break-even point in sales value and units.

Q6. Explain what is meant by the overhead allocation problem. Why is it important?

Q7. Explain how the allocation of overhead costs to products/ services differs under absorption costing and activity-based costing. What are the costs and benefits of each method?

Answer 1

Ans -6 Overheads are those expenses which are incurred during production as a whole but can not chargeable directly to the product or services ,

Without overheads no production can be incurred , there are various methods in cost accounting to allocate the overheads to different cost center

Overhead allocation problem is the problem related to correctly allocate the right amount of overhead to cost center , some time there may be probem to allocate overheads ,

It is important beacuse overheads are also included in the total cost of the product and also when there is final cost calculation of cost from every cost center , right alllocation of overheads is very vital.

Ans-7 Allocation of overheads in absorption costing - in this system the overheads incurred are charged to the cost of product whether the product has been sold or not ,

Benefit- this method belives in adding more cost to the closing stock , that will be appear as an asset in the starting of next accounting peroid .

Allocation of overheads in ABC costing - ABC costing method allocate overheads in logical manner in comparison to traditional approach

Benefit - it allocates the overhead only to those products which actually demanding the activities undertaking .