ACG2071 - Chapter 2

Cost Driver or Allocation Base

- A measure such as direct labor-hours or machine hours used to assign overhead costs to products and services. - A factor that causes overhead costs to occur.

Product-level activities include:

- Designing - Engineering changes

An activity measure in activity-based absorption costing is used as:

An Allocation Base

Cost-plus pricing

The application of a predetermined markup to a base in order to determine the target selling price.

Overhead Application

The process of assigning overhead cost to specific jobs or products.

Activity Measure

an allocation base that is used as the denominator for an activity cost pool.

The adjustment for underapplied overhead:

increases COGS and decreases net operating income

Product-level activities

- Activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run. - Costs at the product-level depend on the number of products supported rather than the number of batches run or the number of units of product produced or sold.

Under absorption costing

- All manufacturing costs are assigned to units of product - All nonmanufacturing costs are treated as period costs.

Manufacturing Overhead Costs

- Are indirect costs - Consist of many different items

Widely used allocation bases in manufacturing include:

- Direct Labor Costs - Direct Labor Hours - Units of Product - Machine Hours

Categories of Manufacturing Costs include:

- Direct materials - Direct labor - Manufacturing overhead

Two main reasons companies assign costs to products and services:

- Helps fulfill their Planning, Controlling, and Decision-making responsibilities. - Helps them determine the value of ending inventories and cost of goods sold for external reporting purposes.

Direct Labor Costs

- Labor costs that are easily traced to a job.

Materials Requisition Forms are used for:

- Making journal entries in accounting records - Controlling the flow of materials into production

A job cost sheet contains:

- Materials costs charged to the job - Manufacturing overhead costs charged to the job - Labor costs charged to the job.

Batch-level activities include:

- Setting up equipment - Placing purchase orders - Arranging shipments to customers

The unit product cost is the same as the:

- Total job cost divided by number of units. - Average product cost per unit.

When predetermined overhead rates are based on budgeted activity:

- Unit product costs fluctuate depending on budgeted activity - Products are charged for resources they don't use.

Activity-based Absorption Costing

- Uses a volume-related allocation base for all of the manufacturing costs. - Assigns all manufacturing overhead costs to products based on activities performed to make those products.

Companies that use job-order costing

- make many different products.

The total cost of a job includes:

-Direct Materials Cost -Direct Labor Cost -Applied Manufacturing Overhead

Activity Cost Pool

A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system.

A normal cost system assigns overhead to jobs using:

A predetermined overhead rate

A bill of materials contains:

The Type & Quantity of each direct material needed to complete a unit of product.

True or False: One reason to use a predetermined overhead rate is to eliminate the effect of seasonal factors.

True

True or False: Too much fixed overhead may be applied to products when the predetermined overhead rate is based on estimated activity.

True

True or False: Total estimated overhead at capacity is generally larger than total estimated overhead at the expected level of activity.

True

True or False: When compared to a departmental approach, using activity-based costing results in more overhead rates.

True

True or false: Allocation bases that do not drive overhead costs will not accurately measure the cost of overhead used.

True

Time ticket

a document that is used to record the amount of time an employee spends on various activities, a specific job, or task.

The appeal of using predetermined departmental overhead rates is they presumably provide:

- A more accurate accounting of costs. - Enhanced information for decision making.

An inappropriate allocation base may result in:

A job-order costing system that may inaccurately assign costs to jobs.

Plantwide Overhead Rate

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

What is the most common approach to product costing throughout the world?

Absorption costing

Batch-level activities

Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. Costs at the batch level depend on the number of batches processed rather than the number of units produced.

Traditional absorption costing systems:

Allocate all manufacturing costs using a volume-related allocation base.

An activity

Any event that causes the consumption of overhead resources.

The costs attached to units that have been sold are included in:

Cost of goods sold on the income statement.

To calculate Unit Product Costs using the job cost sheet:

Divide the total job cost by the number of units produced.

The costs attached to products that have not been sold are included in:

Ending inventories on the balance sheet.

Predetermined Overhead Rate

Estimated Total Manufacturing Overhead Cost divided by the Estimated Total Amount of the Allocation Base

True or False: Activity-based absorption costing only assigns variable manufacturing overhead costs to products.

False

True or False: When predetermined overhead rates are based on capacity, there will typically be large amounts of overapplied overhead.

False.

Average manufacturing overhead cost per unit usually varies from one period to the next because:

Fixed manufacturing overhead remains constant in total even when production changes.

The activity-based approach tends to shift costs from:

High-volume products to Low-volume products.

The difference between overhead applied to work in process and actual overhead is:

Overapplied or Underapplied overhead.

Formula for applying overhead to a specific job (overhead application):

Predetermined Overhead Rate x Amount of the Allocation Base incurred by the job

When all of a company's job cost sheets are viewed collectively they form what is known as a ________.

Subsidiary ledger

The United States requires absorption costing for:

Tax reports and External Financial Reports

True or False: In a multiple predetermined overhead rate system, each production department may have its own predetermined overhead rate.

True

Job Order Costing

used in situations where many different products, each with individual and unique features, are produced each period