Is Charging Overheads to Products and Services Purely Mathematical - Essay Example

In simpler terms, the costs that do not directly affect the item such as rent of the premise, man-hours used and the knowledge needed. Direct costs affect the product and have to be there or production to go on such as raw materials.

Overhead costs are calculated using a preset mathematical formula. In cost accounting, various methods are used to determine overhead costs. For the purpose of this essay, a three-step process as outlined by Jackson, Sawyer, and Jenkins (2008) entails identifying and estimating the overheads in the whole production plant, identifying and estimating the cost driver or an allocation base, and lastly actually computing the overhead rate using a predetermined mathematical procedure. Basing the initial argument on this definition, overheads involve mathematical procedures. The main question, however, is; does recovery of overheads just involves mathematical procedures geared towards realizing a precise cost? This question will be answered as the article concludes.

Basing on Jackson, Sawyer and Jenkins’ (2008) three-step arguments, there are two steps that precede the actual computation of overheads. Identification and estimation of the overheads lead the three. In this process, all the indirect costs of production are factored and estimated. As earlier mentioned, these costs vary from rent, knowledge, air conditioning, man-hours and any other costs that the person in charge of overhead recovery may link and associate with the product as just costs of production. This is a non-mathematical procedure that, however, includes some mathematical estimation. The main essence of this estimation is trying to get all costs that were associated with the final production of the end product. Depending on the person estimating various costs can be included or left out.

A good example is a cost of calling suppliers to speed up material supply. The cost is just considering that the call was made to ensure production went through smoothly. Some other costs might be realized by some people and not noted by authors. The cost of production during the summer might not be the same as the cost during winter due to air conditioning charges that vary. Basing the argument on these estimates, there is no precise overhead cost. Above that, there is more that is involved in the calculation of overheads than just the last-step mathematical computation. Read More