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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

Which of the following is the correct description of 'overheads' in cost accounting, as treated in the chapter on absorption costing?

Overheads are the aggregate of indirect material, indirect labour and indirect expenses. These costs cannot be conveniently traced to a single cost unit, so they are collected, apportioned and absorbed. Prime cost, by contrast, consists of direct material, direct labour and direct expenses.

  1. AAggregate of indirect material, indirect labour and indirect expensesCorrect
  2. BAggregate of direct material and direct labour only
  3. COnly the expenses incurred in the selling and distribution function
  4. DOnly the indirect expenses, excluding indirect material and indirect labour

Explanation

Overheads are the total of indirect material, indirect labour and indirect expenses, which cannot be directly traced to a cost unit. Option B describes prime cost, not overheads. Overheads are not limited to selling expenses or to indirect expenses alone.

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