Recovered Overhead refers to the portion of overhead costs that have been allocated or anticipated to be recouped through cost allocation processes typically related to production or project work. These are indirect costs that a business recovers by spreading them across specific projects or through product costs.
Examples
- Manufacturing: In a manufacturing setting, general and administrative expenses like utility bills, factory maintenance, and management salaries are recovered by allocating these overhead costs proportionately to the cost of goods sold (COGS).
- Construction Project: In construction, overhead costs related to project management, site office expenses, and insurance may be allocated to different contracts or projects and recovered through payment invoiced to clients.
- Service Industry: A consulting company might allocate overhead costs such as office leases, office supplies, and IT support across various client projects to ensure these costs are covered.
Frequently Asked Questions (FAQs)
Q1: What is the difference between recovered overhead and absorbed overhead?
- A1: Recovered overhead refers to the cost that has been allocated and expected to be recouped, while absorbed overhead represents the allocation of indirect costs to individual cost units, ensuring they are part of the product/service cost structure upon completion.
Q2: How is recovered overhead calculated?
- A2: Recovered overhead is calculated by dividing the total overhead costs by a chosen allocation base, such as direct labor hours, machine hours, or material costs, and then applying this rate to individual cost centers.
Q3: Why is recovering overhead important?
- A3: Recovering overhead is vital for determining the true cost of products or projects, setting competitive prices, and ensuring the business covers its indirect costs.
Q4: Which businesses benefit most from tracking recovered overhead?
- A4: Manufacturing companies, construction firms, and service-based enterprises benefit significantly as they often incur significant indirect expenses that need accurate allocation.
Related Terms
Absorbed Overhead
- The portion of overhead costs assigned to individual cost units/units of production.
Overhead Rate
- A calculation used to allocate overhead costs to products/services based on an indirect cost rate.
Cost Allocation
- The process of identifying, accumulating, and assigning costs to cost objects like products, services, or projects.
Online References
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- This comprehensive guide covers principles of cost accounting, including cost allocation and overhead recovery.
- “Cost Management: A Strategic Emphasis” by Edward Blocher, David Stout, and Gary Cokins
- Provides an in-depth understanding of how cost management and overhead allocation impact strategic business decisions.
- “Accounting for Management: Planning and Control” by Richard F. Vancil
- Focuses on the principles and practices of managerial accounting, including the management of overhead costs.
Accounting Basics: “Recovered Overhead” Fundamentals Quiz
### What does 'recovered overhead' mean?
- [ ] Direct manufacturing costs
- [x] Overhead costs recouped through allocation
- [ ] Direct labor costs
- [ ] Costs attributed to raw materials
> **Explanation:** Recovered overhead refers to the overhead costs that are allocated and expected to be recouped.
### In which industry is recovered overhead allocation particularly beneficial?
- [x] Manufacturing
- [ ] Retail
- [ ] Tourism
- [ ] Real Estate
> **Explanation:** In manufacturing, recovering overhead helps to distribute indirect costs like utilities and management salaries across production.
### What is the key to calculating recovered overhead?
- [ ] Dividing total direct labor by total costs
- [ ] Subtracting total expenses from overhead
- [x] Dividing total overhead by an allocation base
- [ ] Adding total revenue to overhead
> **Explanation:** The correct method involves dividing total overhead by an allocation base such as labor hours or machine hours.
### Which of the following is not a typical base for overhead allocation?
- [x] Number of customers
- [ ] Direct labor hours
- [ ] Machine hours
- [ ] Material costs
> **Explanation:** Overhead is usually allocated based on direct labor hours, machine hours, or material costs, but not the number of customers.
### Absorbed overhead and recovered overhead are:
- [ ] Completely unrelated terms
- [x] Related but not synonymous
- [ ] Identical concepts
- [ ] Exclusive to service industry only
> **Explanation:** Absorbed and recovered overhead are related concepts but are not identical; absorbed refers to overhead already allocated, while recovered refers to anticipated recouping.
### Why is it essential to recover overhead?
- [ ] Reduce direct labor costs
- [ ] Increase indirect profit margins
- [x] Ensure true product/project costing
- [ ] Increase raw material quality
> **Explanation:** Recovering overhead is fundamental for determining the accurate cost of products or projects and ensuring all costs are covered.
### How does recovered overhead impact pricing?
- [ ] Reduces selling price
- [ ] Increases unit production
- [x] Ensures competitive and profitable pricing
- [ ] Decreases overhead costs
> **Explanation:** Accurate recovery of overhead costs ensures that pricing reflects all associated costs, making pricing both competitive and profitable.
### What is the outcome of improper overhead recovery?
- [ ] Increased profit margins
- [ ] Higher customer satisfaction
- [x] Inaccurate costing and potential losses
- [ ] Reduced overhead variance
> **Explanation:** Improper recovery leads to inaccurate product/project costing and could potentially result in financial losses.
### Which document often requires detailed overhead recovery analysis?
- [ ] Cash flow statement
- [ ] General ledger
- [ ] Marketing plan
- [x] Cost of Goods Sold (COGS) report
> **Explanation:** The COGS report typically includes overhead costs, indicating the need for detailed recovery analysis.
### What is necessary for allocating overhead accurately?
- [ ] Regular labor cost updates
- [ ] Weekly financial audits
- [x] Consistent allocation base
- [ ] Frequent client feedback sessions
> **Explanation:** Using a consistent allocation base such as labor or machine hours, accurate overhead allocation can be achieved, ensuring reliability.
Thank you for exploring the fundamental concepts of “Recovered Overhead” with us and tackling some challenging quizzes to test your knowledge. Keep enhancing your understanding of accounting principles!
