Managerial Accounting Chapter 2

Multiple predetermined overhead rates

A cost system that uses more than one overhead rate to apply overhead costs to a job More complex, but more accurately reflects differences across departments in terms of how jobs consume overhead costs

Bill of materials

A document that lists the quantity of each type of direct material needed to complete a unit of product When an agreement is made about the quantities, prices, and shipping date, a production order is issued

Absorption costing

All manufacturing costs, both fixed and variable, are assigned to units of product -- units are said to fully absorb manufacturing costs

Normal cost system

Applies overhead costs to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job

Predetermined overhead rate

Computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base 1. Estimate total amount of allocation base that will be required for the next period's estimated level of production 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base 3. Use the cost formula (Y=a+bX) to estimate the total manufacturing overhead cost for the coming period 4. Compute the predetermined overhead

Cost-plus pricing

Managers establish a markup percentage that they believe will generate enough revenue to cover all of a job's manufacturing costs and a portion of the company's nonmanufacturing costs, while generating some residual profit

Overhead application

Process of assigning overhead costs to a job Overhead applied to a particular job= predetermined overhead rate x Amount of the allocation base incurred by the job

Job cost sheet

Records the materials, labor, and manufacturing overhead costs charged to that job

Job-order costing

Used in situations where many different products, each with individual and unique features, are produced each period Costs are traced and allocated to jobs and then the costs of the job are divided by the number of units to arrive at an average cost per unit, also known as the unit product cost.

Materials question form

A document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials

Cost driver

A factor, such as machine hours, bed occupied, computer time, or flight hours, that causes overhead costs If the base does not "drive" overhead costs, it will not accurately measure the cost of overhead resources used by each job

Allocation base

A measure such as direct labor hours or machine hours that is used to assign overhead costs to products and services. Most widely used allocation bases in manufacturing are direct labor hours, direct labor cost, machine hours, and units of product

Plantwide overhead rate

A single predetermined overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct labor hours