DIRECT EXPENSES & OVERHEAD

(Guest)

Expenses can be classified as direct and indirect expenses.

v Direct Expenses: are defined as “costs other than material or wages, which are incurred for a specific product/production process or providing of services”.

v Indirect Expenses: are those expenses which cannot be directly allocated to a specific cost & service. For example: rent, rates, insurance of factory etc.

v Overhead: is the aggregate of indirect material costs, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object in an economically feasible way. It is also known as indirect cost.

Q1. Freight inward is a direct expense.

(a) True

(b) False

NOTE: Freight inward is a direct expense, if the goods are handled by an outside carrier whose charges may be related to individual units/group of Unit.

Q2. Which direct expense can be charged as a rate per unit?

(a) Hire charges of plant

(b) Royalties

(d) Traveling expenses

NOTE:

Ø Hire charges of plant : is used for specific job

Ø Royalties is charged as a rate per unit

Ø Freight: handled by an outside carrier whose charges can be related to individual units.

Ø Traveling expenses: incurred on a particular contract.

Q3. Which of the following are not indirect expenses?

(a) Rent

(b) Insurance

(c) Salesman commission

(d) Advertisement

NOTE:

Ø Rent and Insurance is not directly related to specific job

Ø Advertisement can not conveniently allocated to cost center or cost unit

Ø Salesman Commission is based on the value of particular units sold

Q4. In modern industrial undertakings, overheads include various kinds of direct costs.

(a) True

(b) False

NOTE: Overhead is the aggregate of indirect material costs, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object in an economically feasible way. It is also known as indirect cost. For example: rent, rates, insurance of factory, etc.

Q5. Which of the following shows the correct number of bases of overheads classification?

(a) Two

(b) Three

(d) Five

NOTE: Overheads are classified into 3 types which include function-wise classification, behavior – wise classification and element –wise classification.

Ø Functional-wise classification: Production overhead, administrative overhead, selling overhead, distribution overhead.

Ø Behavior- wise classification: Fixed overhead, variable overhead, semi-variable overhead

Ø Element-wise classification: Indirect materials, indirect labour, indirect expenses.

Q6. In the modern Industrial undertakings, manufacturing overheads include all direct costs incurred in the running of manufacturing division of the factory.

(a) True

(b) False

NOTE: Manufacturing overheads include all indirect costs i.e. indirect materials, indirect labour and indirect expenses incurred in manufacturing and production department.

Q7. The classification of overheads expenditure depends upon the nature of the product or service.

(a) True

(b) False

NOTE: Classification of overheads is the process of grouping the various items of overheads into distinct class /group on the basis of some common characteristics. So

the classification of overheads expenditure depends upon the type and size of a business and the nature of the product or the service rendered.

Q8. Which of the following is a behavioral overhead?

(a) Fixed Overheads

(b) Indirect Expenses

(d) Administrative Overheads

NOTE: Based on the behavior patterns, overhead are classified into fixed overheads, variable overheads and semi-variable overheads.

Q9. In large factories, standing order numbers help in grouping smaller and similar indirect expenses.

(a) True

(b) False

NOTE: Standing order number system is the system under which a number is allotted to each item of expense for the purpose of identification. So in the large factories it becomes easy to classify the indirect expenditure in the groups.

The following are the methods used to allot the identification code under standing order number system:

(1) Numerical coding: Under this system, a fixed number is allotted

(2) Mnemonic method: This system uses alphabets and letters to help the memory. For example: AD as Administration

(3) Decimal method: Under this system, a whole number like 1.1 or 3.2.1 is allotted for the head of the expenditure or master group while the decimals are allotted to the primary or secondary items.

(4) Field method: Under this method, codes are used as numeric in nature and each code number is consists of nine digits. For example: in code 20 130 02 06 whereas 20 stands for variable costs, 130 stands for idle time etc.

(5) Combination of symbol and numbers: Under this method, a combination of symbol alphabet and a number is used as code. For example: M1 stands for Maintenance of building.

Q10. The cost of indirect materials purchased in a month from which of the following account?

(a) Wages account

(b) Cost ledger control account

(d) Factory overhead control account

NOTE: At the end of each month, the total of indirect materials is charged or debited from factory overhead control account and credited to stores ledger control account.

Q11. At the end of the month, the total of indirect expenses is credited to which of the following account?

(a) Wages account

(b) Cost ledger control account

(d) Factory overhead control account