1.

Examples of Overhead Costs Incurred by Café

There are several aspects in which the café has to manage its overhead cost and some of them
are for advertising, labour, repairs, telephone bills etc. Taking these aspects into account the
first one is advertising which is an important factor for the business to maintain its stance in
the business world and if they are lacking in it then the rivals would gain competitive
advantage. The advertising is an aspect that does not require much money to operate as now
due to advancement in technology everything can be done through online means and without
wastage of money as compared to previous years where everything had to be printed for
advertisement (Kang et al., 2010). The cost of advertising is less so the café can easily be
adjusted into other aspects. However still some cafe’s printing is available as in Second Cup
Café as they print their menus which requires some cost and also promote their new coffee’s
through pamphlets and would cost $3 for printing which is an extra money they spent to gain
more customers and is working for them as well. While on the other hand and one of the
major aspects is the labour cost. The workers at the cafés are many and handling the payment
of theirs is a big task as the manager has to handle the payment and set it according to the
revenue they are gaining through the café. Another factor is based on the repairs that are
required at the café and every month a full repairing is done which has to be cut out from the
cost gained by the profit (Delgado and Gill, 2018). Whilst telephone bills are another factor
as the phone is used to contact different suppliers and customers therefore the bill cost can
vary as sometimes it can be high whilst sometimes low but it is a major factor where the
overhead costs needs to be incurred.

2. Treatment of Overhead Cost

The manner in which the overhead cost is described in the following manner is provided
below:

a. Assigning overhead to production and service centres

The factory is usually divided into several departments for have a better control over the firm,
jobs and their products etc. and each one of these departments belongs to the cost centre. The
division of such departments is done into production and service departments. The process
carried out by the production department is based on the actual production taking place in the
output or the process that carries the operation, whereas the rendering part of the services to
the production department is the job of the service department (Hansen et al., 2007). The
auxiliary departments are the service departments as they have nothing to do with the
production but their presence is important for the production department for rendering special
services. Expenses are incurred in both the departments (production and service). There are
some expenses that are taken into account for the benefit of all the departments. Therefore, if
exclusively for one department the benefit of expense has been incurred than only that
department is allowed to be charged for that expense that one that was incurred must be
distributed in a way that it is suitable for every department. This is known as primary
distribution process. The process which involves allocating and assigning as well as
apportioning the expenses of the overhead in regard to all the departments of the working
place are represented by primary distribution (Drucy, 2013).

b. Re-allocation of Overhead of Service Centres to Production Centres

The service departments are used to provide services to the production departments. In regard
to the production departments cost it is essential for the expenses of the service department to
be reapportioned amid the department of production only. The process of re-allocation and re
distribution of the service department cost to the department of production is called
‘secondary distribution’ of the overheads. Some of the methods involved in the reallocation
of services include: direct method, step-down method, repeated distribution method,
simultaneous equations method and reciprocal method. Such methods have a different feature
which is essential to understand for the reallocation of overheads. The service centres to the
production centre the re-allocation is done in such a manner that it would be beneficial for
both the aspects (Horngren, 2009). Direct allocation is known as an essential method out of
the other four methods for the purpose of allocating the service department’s overheads to the
production department.

c. How would these Overheads Affect Profit if Sales Decline

Business firms plan, measure, and investigate overhead expenses as exchanges in explicit
cost class accounts. Therefore, overhead costs eventually affect Income articulation benefits.
As "costs" increment, "benefits" decline. Note that overhead can influence operating profit,
gross and primary concern is based on the net profit. Organizations that move items or
administrations must know their per-unit item costs. This cost data is basic when setting costs
and it is critical for dealing with the item portfolio successfully (Shepherd, 2015). The firm
has an imperative enthusiasm for knowing which items move with worthy Gross Margin and
which move at a misfortune. In item costing, be that as it may, overhead "muddies the
waters" and makes it hard to gauge per-unit costs precisely. As a rule, examiners gauge as
opposed to quantify per-unit overhead expenses. Segments underneath show how cost
bookkeepers use cost distribution to dole out per-unit overhead expenses in a roundabout
way. The service cost and production cost can highly be affected if the sales would decline as
it is based on several aspects that are needed for the business to produce and work. Therefore
to increase the sales it is important to maintain a balance between these two aspects as only
then profit can be gained even if the sales is less (Horngren, 2009).

References

Delgado, R.I. and Gill, S.L., 2018. A microcosting study of establishing a Baby Café® in
Texas. Journal of Human Lactation, 34(1), pp.77-83.

Drucy, C.M., 2013. Management and cost accounting. Springer.

Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control.
Cengage Learning.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.

Kang, H.O., Lee, S.M. and Kim, Y.H., 2010. Menu analysis for coffee shop operation: Using
activity-based costing.

Shepherd, R.W., 2015. Theory of cost and production functions (Vol. 2951). Princeton
University Press.