Chapter 4

What are the 3 types of relationships/criterion you might see between a cost allocation base and an indirect cost pool? List in order of which relationship is preferred.

1. Cause-and-effect relationship between allocation base and cost pool 2. Benefits received 3. Ability to bear

List the 3 days to deal with under/over applied MOH.

1. Compute actual rate at end of period; go back and re-compute cost of jobs using actual rate 2. Prorate under/over applied amount to WIP, FG, and COGS 3. Close all under/over applied amount to COGS

What are the 2 main disadvantages of a normal costing system?

1. The cost of a job includes a component that is a guess 2. Actual MOH probably won't equal applied MOH

What are the 2 main advantages of a normal costing system?

1. We can determine the cost of jobs as they are completed throughout the year 2. Fluctuations in MOH are smoothed out over the year

What is a cost allocation base?

A systematic way to link an indirect cost (or group of indirect costs) to a cost object

What are the two ways to include MOH in product cost via allocation to WIP?

Actual costing: determine actual MOH for the period and allocate it to WIP Normal costing: use a pre-determined overhead application rate based on estimated overhead and actual use of allocation base to allocate MOH to WIP

What is the equation to calculate the cost of a job?

DM + DL + MOH Applied

Does GAAP require job or process costing?

GAAP allows either- different methods have different uses

If you were recognizing direct labor costs at the end of the period, what else might you need to consider?

If MOH is applied based on direct labor cost, you would need to make an additional entry to recognize MOH applied to WIP.

What is the format for an overview diagram of a job-costing system?

Indirect cost pool (rectangle) Cost allocation base (octagon) Overhead application rate Cost object: Job (rectangle- top half is allocated overhead, bottom half is direct costs) Direct costs (triangles)

Compare job order costing and process costing.

Job order costing: used for differentiated orders of unlike products that are customized; it tracks the cost per job. Process costing: used for mass production of an identical product with uniform processes; it tracks the cost of a batch.

What are the benefits of normal costing?

MOH can be allocated to jobs throughout the period, and so is more timely; also, because it is based on a rate, the application is smoother

Why might managers prefer to use normal costing?

Managers might prefer to use normal costing because it enables them to use the budgeted manufacturing overhead rate determined at the beginning of the year to estimate the cost of a job as soon as the job is completed. Managers want to know job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, managers would only determine the cost of a job at the end of the year when they know actual manufacturing overhead costs.

When is MOH over applied? Under applied?

Over applied: Applied MOH > Actual MOH Under applied: Applied MOH < Actual MOH

What is the equation to calculate the PDOAR?

PDOAR = budgeted annual indirect cost / budgeted annual quantity of cost allocation base

Ideally, what should the cost allocation base be?

The cost allocation base should be the cost driver for the indirect costs.

What is the problem with actual costing?

The information isn't timely, because we don't know actual MOH until the end of the period; also, there is more fluctuation in the amount of MOH (ex- seasonal)

Under job-order costing, what is the cost object?

The job

Why is there no over- or underallocated manufacturing overhead under actual costing?

There is no under- or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual allocation based used and the actual manufacturing overhead rate. This, of course, equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or overallocated overhead.

Compare the actual and applied MOH for actual and normal costing.

Under actual costing: MOH isn't applied until the end of the period, so the MOH applied is equal to actual MOH, and therefore there is no difference between the two. Under normal costing: MOH is applied based on the PDOAR and actual usage of the CAB, and therefore will not be the same as actual MOH.

When is direct write-off to COGS for over- or underallocated overhead appropriate?

Writing off all of the underallocated manufacturing overhead to Cost of Goods Sold (CGS) is usually warranted when CGS is large relative to Work-in-Process and Finished Goods Inventory and the underallocated manufacturing overhead is immaterial.