Accounting Lecture 9

• Cost object


  Anything (product, service, activity) for which a separate measurement of cost is required
• Direct costs


  • Can be specifically and exclusively identified with a given cost object
  • E.g. the costs of materials and direct labour ('prime' costs)
• Indirect costs (overheads)


  • Cannot be specifically and exclusively identified with a given cost object
  • They are assigned to cost objects on the basis of cost allocations, using surrogate measures such as the number of employees
• Direct costs


  • Airport landing and holding charges
  • Jet fuel
  • In-flight meals
• Indirect costs


  • HR director's salary
  • Maintenance team of 200 staff
• Overheads


  Allocated indirect costs
• Bases for cost apportionment

  • Different types of overheads should be apportioned using different bases (cost drivers)
  • Traditional cost drivers: labour hours, machine hours
• Absorption costing


  The process of allocating overheads to cost objects
• Overhead absorption rate


  The rate at which overheads are attributed to cost objects based on the cost driver = cost absorbed per unit of cost driver
• Overhead absorption rate


  • £10 per direct labour hour
• Blanket overhead absorption rates

  • The same absorption rate is used in the whole organisation
• Departmental overhead absorption rates

  • Different absorption rates are used in different departments of the organisation
• Blanket overhead absorption rate

  • £15 per direct labour hour
• Two-stage allocation process


  1. Stage 1 - assign overheads initially to departments

  2. Stage 2 - allocate departmental overheads to products using second stage allocation bases/cost drivers