Purposes of Overhead Cost Analysis
There are a number of situations whether the analysis of overhead costs will assist in the satisfactory evaluation of the relevant cost data. These involve:
a) The control of overhead expenditures
There should be a link between the manager responsible and overhead cost for its control. This is best achieved via having the planned level of overhead costs for all cost center compared to the real cost incurred in order that any type of differences may be corrective and investigated measures taken.
b) Charging of overheads to cost units
Whether products pass from one cost center to another in the production cycle, then direct costs for labour and material are charged to them. In addition, all job or product should share a part of indirect costs of the business. It may be done via assessing the advantages extracted from each cost center via that the job or product passes and after that choosing a appropriate absorption basis
c) Valuation of work in progress
At any point in this time, there may be partly finished goods in the production cycle. That work in progress should be valued at the end of an accounting period in order such profit be computed and a balance sheet arrived at. It may be achieved via the absorption of production overheads in all cost centers.
d) Valuation of abnormal losses
This is as same as procedure to that for work in progress. Those losses need also to be charged to the departments such incur them for efficiency analysis reasons.
e) Profit measurement
The valuation of work in development and finished goods stock will affect the profit reported. The basis on that production overhead has been absorbed via cost units will hence have a direct influence on the level of profit reported throughout the period.
f) Decision making
This is vital that relevant costs are utilized in any decision making situation. Production overhead costs may be allocated to a department as cost center or apportioned to it utilizing some arbitrary apportionment basis. In addition the overhead cost might be a variable or fixed behaviour pattern like activity changes. The net costs associated along with cost centre and the organization like a whole affect the kind of decisions made via the management. Although such relevant costs require being incremental as making a difference and future costs as not sunk costs such are controllable or like not uncontrollable via management.