The Concept of Linear Programming - Assignment Example

Overhead costs refer to the circuitous (indirect) production costs. They are costs, which are chargeable to a cost unit on an estimated basis. Similarly, overhead cost refers to the total cost of indirect materials, indirect labour and indirect expenses (Joel, 2004). The estimating method enables a share of the circuitous costs to be charged to each cost unit. It is notable that these charges are not identified specifically to the final product. For instance, these costs are chargeable on production centres, service cost centres and other non-production cost centres.

Mr Smith is right in calculating the marginal profit. It is evident that he has used marginal costing (Joel, 2004). One of the principles guiding marginal costing rejects absorption of fixed costs into unit costs. In this case, factory overhead is a fixed expense, which cannot be absorbed to the rate per labour hour as Howie’s accountant suggests (Joel, 2004) However, it is notable that, Howie’s opinion is applicable in absorption costing where fixed expenses are absorbed into unit costs (Joel, 2004).