Definition
An Overhead Analysis Sheet, often referred to as an Overhead Distribution Summary, is a detailed document used in cost accounting to charge manufacturing overhead costs to the different cost centers within an organization. This allocation is achieved by employing appropriate allocation or apportionment techniques that systematically distribute each item of manufacturing overhead.
Examples
- Factory Overheads: If the total heating cost for a factory is $10,000, an overhead analysis sheet might allocate this cost based on the square footage occupied by each department within that factory.
- Administrative Overheads: Similarly, if administrative expenses like supervisor salaries are to be distributed, the allocation might be based on the number of employees in each department benefiting from the supervisor’s work.
Frequently Asked Questions
What is the purpose of an overhead analysis sheet?
An overhead analysis sheet is used to systematically distribute overhead costs to various cost centers, allowing for more accurate product costing and financial analysis.
How are overhead costs allocated to cost centers?
Overhead costs are allocated to cost centers using allocation bases such as direct labor hours, machine hours, or square footage. The chosen basis should reflect the extent to which each cost center consumes the overhead.
What is the difference between allocation and apportionment in overhead analysis?
Allocation refers to the direct assignment of overhead costs to a specific cost center, while apportionment involves distributing a portion of an overhead cost to multiple cost centers based on a predetermined ratio or formula.
Why is the overhead distribution summary important?
It ensures that overhead costs are accurately charged to the related cost centers, leading to precise product costing and better financial control.
Can service departments be included in the overhead analysis sheet?
Yes, service departments like maintenance, IT, and administration can also have their overhead costs allocated to production departments to provide a complete picture of overhead distribution.
- Manufacturing Overhead: These are all indirect costs associated with producing a product, including facility maintenance, utilities, and equipment depreciation.
- Cost Centers: These are individual departments or functions within an organization where costs are accumulated and controlled.
- Allocation: The process of assigning whole overhead costs directly to cost centers.
- Apportionment: The process of distributing a portion of overhead costs to multiple cost centers based on a rational basis.
Online References
- Investopedia – Overhead
- AccountingTools – Allocation of Overhead
- The Balance Small Business – Types of Overhead
Suggested Books for Further Studies
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and George Foster
- Management and Cost Accounting by Colin Drury
- Manufacturing Overhead Cost Planning and Control by Ronald L. Brown
Accounting Basics: Overhead Analysis Sheet Fundamentals Quiz
### What is the main purpose of an overhead analysis sheet?
- [ ] To track direct material costs
- [x] To distribute overhead costs to cost centers
- [ ] To allocate sales revenue across departments
- [ ] To measure employee performance
> **Explanation:** The main purpose of an overhead analysis sheet is to distribute overhead costs to the organization's various cost centers, ensuring accurate cost allocation.
### How are overhead costs typically allocated to cost centers?
- [ ] Randomly
- [ ] Equally among all centers
- [x] Using a rational allocation basis like labor hours or machine hours
- [ ] Based on the preference of the financial manager
> **Explanation:** Overhead costs are typically allocated using a rational allocation basis that reflects each cost center's consumption of the overhead.
### What is an example of an appropriate allocation base for distributing overhead costs?
- [ ] Sales revenue
- [x] Machine hours
- [ ] Number of customers
- [ ] Employee satisfaction scores
> **Explanation:** An appropriate allocation base, like machine hours, is used to distribute overhead costs proportionately to the utilization of the resource.
### Allocation or apportionment of overhead costs is crucial because?
- [x] It ensures accurate product costing and financial control
- [ ] It increases the total overhead costs
- [ ] It reduces the need for direct labor
- [ ] It eliminates the possibility of errors
> **Explanation:** Allocation or apportionment of overhead costs is crucial as it ensures the expenses are assigned correctly, leading to accurate product costing and better financial management.
### What is the difference between allocation and apportionment of overhead?
- [ ] Allocation is random; apportionment is rational
- [x] Allocation assigns overhead to a single cost center, apportionment distributes it across multiple
- [ ] Allocation is done monthly, apportionment annually
- [ ] There is no difference
> **Explanation:** Allocation assigns overhead to a single cost center, whereas apportionment distributes the cost across multiple cost centers based on a predetermined method.
### When is apportionment used instead of allocation?
- [ ] When overhead is easy to divide
- [ ] When overhead relates to only one department
- [x] When the overhead cost relates to multiple departments or activities
- [ ] When an external audit requires it
> **Explanation:** Apportionment is used when the overhead cost pertains to multiple departments or activities and needs to be divided among them based on usage.
### Which type of cost can be included in an overhead analysis sheet?
- [ ] Direct materials
- [ ] Direct labor
- [x] Indirect costs like utilities and maintenance
- [ ] Sales commissions
> **Explanation:** The overhead analysis sheet includes only indirect costs like utilities, maintenance, etc., not direct costs like materials or labor.
### Why might a company allocate administrative overhead to production departments?
- [ ] To increase total overhead
- [x] For more accurate product costing
- [ ] To reduce the number of cost centers
- [ ] To avoid the need for cost apportionment
> **Explanation:** Allocating administrative overhead to production departments allows for more accurate product costing by ensuring all related expenses are accounted for.
### Can service departments be included in the overhead analysis sheet?
- [x] Yes, their costs can be allocated to production departments
- [ ] No, only production departments are included
- [ ] Only if they are profit centers
- [ ] Only if they have direct costs
> **Explanation:** Service departments like IT, maintenance, and administration can have their costs allocated to production departments to provide a comprehensive view of overhead distribution.
### Why is a rational basis essential for the allocation of overhead?
- [ ] To simplify the accounting process
- [ ] To reduce overhead costs
- [x] To ensure fair and accurate distribution of overhead costs
- [ ] To comply with tax regulations
> **Explanation:** A rational basis is essential to ensure the fair and accurate distribution of overhead costs, reflecting each cost center's use of the overhead resources.
Thank you for exploring the vital concepts and questions surrounding the Overhead Analysis Sheet. Keep enhancing your understanding and proficiency in cost accounting!
