Learning Objectives

1 explain the nature of overhead costs and other indirect costs;

2 describe the general principles for allocating indirect costs to cost objects;

3 allocate overhead costs to products, using a plantwide rate;

4 use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products;

5 use activity-based costing principles to assign overheads to products;

6 recognise the costs and benefits of choosing alternative approaches to assigning overhead costs to products;

7 explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-volume-based cost drivers, and deciding between budgeted and actual overhead rates;

8 explain the effect of alternative capacity measures on overhead rates;

9 discuss the general principles and reasons for allocating indirect costs to responsibility centres;

10 allocate support department costs to production departments using the direct method, the step-down method and the reciprocal services method; and

11 after studying the appendix, understand and evaluate variable and absorption costing and prepare income statements using both approaches.