2 : ALLOCATION BASE, PREDETERMINED OVERHEAD RATE, OVERHEAD APPLICATION

When a company instead creates OVERHEAD RATES based on the activities that it performs.

Activity-based costing

A measure of activity such as DIRECT LABOR-HOURS or MACHINE-HOURS that is used to assign costs to cost objects.

Allocation base

What is the abbreviation for PREDETERMINED OVERHEAD RATE?

POHR

What is STEP 4 of calculating the PREDETERMINED OVERHEAD RATE?

Compute the predetermined overhead rate

A factor, such as MACHINE-HOURS, beds occupied, computer time, or flight-hours; that causes OVERHEAD COSTS.

Cost driver

If a company OVERAPPLIED OVERHEAD what happens to the COGS on the INCOME STATEMENT?

Decreases COGS, increases net operating income

What are the most commonly used ALLOCATION BASES?

Direct labor-hours, direct-labor costs, machine hours, units of product

What is the equation for TOTAL COSTS?

Direct materials + direct labor + manufacturing overhead applied

What does TOTAL COSTS include?

Direct materials, direct labor, manufacturing overhead

Y = a + bX. X stands for... E is ESTIMATED.

E total amount of allocation base

Y = a + bX. a stands for... E is ESTIMATED.

E total fixed manufacturing overhead cost

Y = a + bX. Y stands for... E is ESTIMATED.

E total manufacturing overhead cost

What is the equation for PREDETERMINED OVERHEAD RATE? E means ESTIMATED.

E total manufacturing overhead cost / E total amount of the allocation base

Y = a + bX. b stands for... E is ESTIMATED.

E variable manufacturing overhead cost per unit of allocation base

What is STEP 2 of calculating the PREDETERMINED OVERHEAD RATE?

Identify the total variable and fixed manufacturing overhead cost

What is STEP 1 of calculating the PREDETERMINED OVERHEAD RATE?

Identify total amount of the allocation base

Why is ALLOCATION BASE used?

Impossible to trace costs to particular jobs, manufacturing overhead consists of many items, manufacturing overhead could be fixed

If a company UNDERAPPLIED OVERHEAD what happens to the COGS on the INCOME STATEMENT?

Increase COGS, decreases net operating income

A costing system with multiple OVERHEAD COSTS pools and a different PREDETERMINED OVERHEAD RATE for each cost pool, rather than a single PREDETERMINED OVERHEAD RATE for the entire company. Each production department may be treated as a separate OVERHEAD COST pool.

Multiple predetermined overhead rate

A costing system in which OVERHEAD COSTS are applied to a job by MULTIPLYING a PREDETERMINED OVERHEAD RATE by the actual amount of ALLOCATION BASE incurred by the job.

Normal cost system

When a company applies more OVERHEAD to production than it actually incurs.

Overapplied overhead

The process of assigning overhead cost to specific jobs.

Overhead application

What is the issue with PLANTWIDE OVERHEAD RATE?

Overly simplistic, incorrect to assume that direct-labor hours is a company's only manufacturing overhead cost driver

A single PREDETERMINED OVERHEAD RATE that is used throughout a plant.

Plantwide overhead rate

A rate used to charge MANUFACTURING OVERHEAD cost to jobs that is established in advance for each period. It is computed by DIVIDING the estimated TOTAL MANUFACTURING OVERHEAD COST for the period by the estimated total amount of the ALLOCATION BASE for the period.

Predetermined overhead rate

What is the equation for OVERHEAD APPLICATION? x is MULTIPLICATION.

Predetermined overhead rate x allocation base

Company's job cost sheets are viewed collectively they form?

Subsidiary ledger

When a company applies less OVERHEAD to production than it actually incurs.

Underapplied overhead

What is STEP 3 of calculating the PREDETERMINED OVERHEAD RATE?

Use the cost formula to estimate total manufacturing overhead cost

What is UNIT PRODUCT COST used for?

Valuing unsold units in ending inventory, determining COGS

How are JOB COST SHEETS separated on a ledger?

Work in process, finished goods, COGS