ACCOUNTING CHAPTER 18

Factory overhead includes indirect costs that must be allocated to

the product

Single Plantwide Factory Overhead Rate Formula

total budgeted factory overhead / total budgeted plant wide allocation base

The direct materials and direct labor are direct costs that can be

traced to the product

Activities are

types of work, or actions, involved in a manufacturing or service process.

Product Costing

Determining the cost of a product

3 methods to allocate factory overhead

single multiple activity based costing

Each production run requires a

setup *changing tools in machines to prepare for new products

Advantage of single rate

simple and inexpensive

Disadvantage of single rate

*assumes that the factory overhead costs are consumed in the same way by all products *if a factory consumes FOH in different ways, it may not accurately allocate FOH costs to the product

Conditions indicate that a single rate may cause product cost distortion are: (2)

*differences in production department factory overhead rates *differences among products in the ratios of allocation base usage within a department and across departments

One method of allocating selling and administrative expenses to the products is based on

*sales volume *However, products may consume activities in ways that are unrelated to their sales volumes. *When this occurs, activity-based costing may be a more accurate method of allocation.

Production Department factory overhead rate

Budgeted Department Factory Overhead / Budgeted Department Allocation Base

In ABC departments are identified as

activities *things initially allocated to departments are now there own activities

Under ABC factory overhead costs are initially budgeted for

activities sometimes called cost pools such as machine usage, inspection, moving production setups etc.

activity rate formula

budgeted activity cost / total activity-base usage

Warranty claim activity rate

budgeted warranty claim expenses/ total estimated warranty claim

Choice of allocation is important because the allocation affects

product cost

activity-based costing (ABC) method

provides an alternative approach for allocating factory overhead that uses multiple factory overhead rates based on different activities

multiple production department factory overhead rate method

different rates for each production department to allocate factory overhead costs to products.

Common allocation bases would include (3)

direct labor hours direct labor dollars machine hours

Product Costs consist of

direct materials, direct labor, factory overhead

Engineering Change Order (ECO)

document that initiates changing a product or process

Single Plantwide Factory Overhead Rate

factory overhead costs are allocated to products using only one rate.

Allocation base is a measure of

operating activity in the factory

Generally accepted accounting principles (GAAP) require that selling and administrative expenses be reported as

period expenses on income statement *however can still be allocated for decision making