Cost Ch 4

The numerator reason

(indirect-cost pool) the shorter the period, the influence of seasonal patterns on the amount of costs. An annual period incorporates the effects of all four seasons into a single, annual indirect cost rate. Levels of total indirect costs are also affected by nonseasonal erratic costs. Pooling all indirect costs together over the course of a full year and calculating a single annual indirect cost rate helps smooth some of the erratic bumps in the costs associated with shorter periods

Denominator reason

(quantity of the cost-allocation base) avoid spreading monthly fixed indirect costs over fluctuating levels of monthly output and fluctuating quantities of the cost-allocation base. variable indirect costs vary with the quantity of the cost-allocation base. Fixed indirect costs do not vary with sort-run fluctuations in the quantity of the cost-allocation base

Five step decision-making process

1 Identify the problems and uncertainties 2 Obtain information 3 Make predictions about the future 4 Make decisions by choosing amount alternatives 5 Implement the decision, evaluate performance, and learn

Normal costing (commonly used by manu, merchandise, and service sectors)

1) identify the job that is the chosen cost object 2) identify the direct costs of the job 3) select the cost-allocation bases to uses for allocating indirect costs to the job 4) identify the indirect costs associated with each cost-allocation base 5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job 6) compute the indirect costs allocated to the job 7) compute total cost of job by adding all direct and indirect costs assigned to the job

Actual indirect cost rate

= actual annual indirect costs/ actual annual quantity of the cost-allocation base

actual manufacturing overhead rate

=actual annual manu overhead costs/ actual annual quantity of the cost-allocation base

actual indirect-cost rate

=actual total indirect costs in the pool/ actual total quantity of the cost-allocation base

budgeted indirect-cost rate

=budgeted annual indirect cost/ budgeted annual quantity of the cost allocation base gives rise to normal costing

budgeted manufacturing overhead rate

=budgeted manu overhead costs/ budgeted total quantity of cost-allocation base

Ability to bear

Cost object's "ability to bear" the cost

Management accountants use two basic types of costing systems to assign costs to products or services

Job-costing system Process-costing system

Actual costing

a form of job-costing system. a costing system that traces direct costs to a cost object based on actual direct-cost rates times the actual quantities of the direct-cost inputs used. Indirect costs are allocated based on the actual indirect-cost rates times the actual quantities of cost-allocation bases.

Cost-allocation base

a systematic way to link an indirect cost or group of indirect costs to cost objects. Can be financial or nonfinancial

Actual costing vs normal costing

actual costing uses actual indirect-cost rates calculated annually at the end of the year. normal costing uses budgeted indirect-costs

cost object

anything for which a measurement of costs is desired

Actual costing systems

calculate actual costs of jobs. not commonly used because actual costs cannot be computed in a timely manner. Can only calculate actual indirect-cost rates at end of fiscal year. Need to have this cost information to monitor and manage the cost of jobs while they are in process. Ongoing cost information about jobs also helps managers bid on new jobs while old jobs are still in progress.

predetermined or budgeted indirect cost rate

calculated for each cost pool at the beginning of the fiscal year and overhead costs are allocated to jobs as work progresses

materials-requisition request

contains info about the cost of direct materials used on a specific job and in a specific department. source doc for direct materials.

5 building blocks of job-costing

cost objects the direct costs of a cost object the indirect (overhead) costs of a cost object the indirect cost pool the cost allocation base

indirect costs of a cost object

cost related to a particular cost object that cannot be traced to that cost object in an economically feasible way

normal costing

costing system that 1) traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct -cost inputs and 2) allocates indirect costs based on the budgeted indirect-cost rates times the actual quantities of the cost-allocation bases

nonseasonal erratic costs

costs incurred in a particular month that benefit operations during future months

direct costs of a cost object

costs related to a particular cost object that can be traced to that cost object in an economically feasible (cost-effective) way

cost assignment

general term for assigning costs to a cost object

cost pool

grouping of individual indirect cost items. can range from broad to narrow. Often organized in conjunction with cost-allocation bases.

Generally, managers should chose the allocation approach that

increases the company's value and best represents its performance, while consistently applying the same method year after year

cost allocation method

indirect costs allocated to cost object

numerator reason

indirect-cost pool. actual overhead > budgeted

Cost application base

is the cost-allocation base when the cost object is a job, product, or customer

job-cost record

job-cost sheet. used to record and accumulate all the costs assigned to a specific job, starting when the work begins

Many companies have costing systems that have elements of both

job-costing and process-costing systems that are tailored to the underlying operations

Advantages of normal costing

manufacturing costs of a job are available much earlier. provides managers with information earlier (while there is still time to take corrective actions)

There are two indirect-cost accounts that have to do with manufacturing overhead:

manufacturing overhead control, manufacturing overhead allocated

overallocated indirect costs

occur when the allocated amount of indirect costs in an accounting period is greater than actual (incurred) amount

underallocated indirect costs

occur when the allocated amount of the indirect costs in an accounting period is less than the actual (incurred) amount

source documents

original record that supports journal entries in the accounting system

cost tracing

process of assigning direct costs

cost allocation

process of assigning indirect costs

denominator reason

quantity of allocation base. actual direct manu labor hours < budgeted hours

info technology gives managers

quick and accurate job-costing info, making it easier for them to manage and control jobs. instant feedback to help them control manu overhead costs, jobs in process, jobs completed, and jobs shipped and installed at customer sites

manufacturing overhead control

record of the actual costs in all the individual over head categories (such as indirect materials, indirect manu labor, supervision, engineering, utilities, and plant depreciation)

manufacturing overhead allocated

record of the manu overhead allocated to the individual jobs on the basis of the budgeted rate multiplied by the actual direct manu labor-hours

adjusted allocation-rate approach

restates all overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates. yields the benefits of both the timeliness and convenience of normal costing during the year and the allocation of actual manufacturing over-head costs at year end

labor-time sheet

source doc for direct manu labor. contains info about the amount of labor time used for a specific job in a specific department

Proration approach

spreads underallocated (overallocated) overhead or among ending work-in-process, finished goods inventory, and cost of goods sold

Job-costing system

the cost object is a unit or multiple units of a distinct product or service called a job. Each job generally uses different amounts of resources. The product of service is often a single unit. Also used by companies to cost multiple identical units of distinct products. Because products and services are distinct, job-costing systems are used to accumulated costs separately for each product or service

Process-costing system

the cost object is masses of identical or similar units of a product or service. Divide total costs of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost. The per-unit cost is the average unit cost that applies to each of the identical or similar units produced in that period.

Allocating costs based on benefits received

the higher a division's revenue, the higher the business's allocated cost

Two reasons for using longer periods to calculate indirect costs

the numerator reason the denominator reason

Write off Cost of Goods Sold Approach

the total under (over) allocated manu overhead is included in this year's COGS

The ideal cost-allocation base is the cost driver of the indirect costs because

there is a cause-and-effect relationship between the cost-allocation base and the indirect costs

underallocated (overallocated) indirect costs

under(over)applied, under(over)absorbed indirect costs =actual indirect costs - indirect costs applied