Which sequence best describes how overheads are accounted for?

Which sequence best describes how overheads are accounted for?

• A. They are allocated/apportioned, then re-apportioned only if allocated to a service cost centre, then absorbed into production output.
• B. They are recorded in a separate overhead account but not allocated to cost centres.
• C. They are charged to finished goods only after production completes.
• D. They are allocated/apportioned; if allocated to a service cost centre they are re-apportioned; they are absorbed into the production output.

Answer: (D)

Overheads flow through a three-step process in costing: first they are allocated or apportioned to cost centres, then any service department costs are re-apportioned to production cost centres to reflect the support they provide, and finally those overheads are absorbed into production output to form the cost of units produced. This sequence is best described as allocating or apportioning overheads to cost centres; if they end up in a service cost centre, those costs are re-apportioned to the production cost centres; and then the total overhead is absorbed into the production output. This ensures every unit carrying production costs includes a fair share of overhead, reflecting both production use and service support. The other options miss part of this flow: overheads should not be kept in a separate overhead account without allocation to cost centres; they aren’t charged only after production finishes; and while service department costs are re-apportioned, the description in the best sequence is the clearest and complete.

Overheads flow through a three-step process in costing: first they are allocated or apportioned to cost centres, then any service department costs are re-apportioned to production cost centres to reflect the support they provide, and finally those overheads are absorbed into production output to form the cost of units produced.

This sequence is best described as allocating or apportioning overheads to cost centres; if they end up in a service cost centre, those costs are re-apportioned to the production cost centres; and then the total overhead is absorbed into the production output. This ensures every unit carrying production costs includes a fair share of overhead, reflecting both production use and service support.

The other options miss part of this flow: overheads should not be kept in a separate overhead account without allocation to cost centres; they aren’t charged only after production finishes; and while service department costs are re-apportioned, the description in the best sequence is the clearest and complete.