CH 2 and 4 (Job Order Costing and Activity Based Costing)
Overapplied overhead
A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period. (applied overhead was greater than the actual amount)
Underapplied overhead
A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period. (actual overhead was greater than the amount applied)
Total quality management (TQM) i
A management approach that aims to improve product quality by reducing and eliminating errors, streamlining activities, and continuously improving production processes.
Cost Driver
A measure that has a cause-and-effect relationship with cost and is used to allocate or assign indirect costs to products.
Activity-based costing (ABC)
A method of cost accounting designed to identify streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities.
Activity Proportion
A percentage used to assign indirect costs to products and services in activity-based costing. Computed by dividing the activity cost driver for each product or service by the total activity cost driver.
activity rate
A rate used to assign indirect costs to products and services in activity-based costing. Computed by dividing total activity cost by total activity driver.
Predetermined 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 cost driver
Applied Manufacturing Overhead
Assigning a manufacturing overhead costs to specific jobs. We do this by multiplying the predetermined overhead rate by the actual value of the cost driver.
Job Cost Sheet
Companies record these manufacturing costs on this document which provides a detailed record of the costs incurred to complete a specific job.
Target Costing
Cost management approach that determines what target cost is required to meet the market price and provide a profit for a company's shareholders.
Process cost
Cost of similar goods made in large quantities on an assembly line
Just-in-time (JIT)
Demand-pull system in which materials are purchased and units manufactured as needed to satisfy demand
Three steps to assigning manufacturing overhead costs using a predetermined overhead rate:
Determine the allocation base (cost driver). Calculate the predetermined overhead rate. Assign manufacturing overhead using the predetermined overhead rate.
The Two Stages ABC systems use for cost assignments
In the first stage, indirect costs are assigned to activity cost pools. In the second stage, indirect costs are allocated from the activity cost pools to individual products and services.
Direct Materials
Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.
Allocation Base
Measurable item used to apply indirect (overhead) costs to products or services.
Gross Profit Percentage
Measures the differences in manufacturing overhead cost affect the profitability of each product.
cost-plus pricing
Pricing approach in which the company first determines how much a product or service costs and then adds a mark-up percentage (profit) to arrive at the sales price.
Product Life Cycle
Represents the life of the product from its infancy (an idea), through design, development, product introduction, growth, maturity, and eventual decline.
Net Operating Income
Subtracting the selling, general, and administrative expenses from gross profit
Overapplied or Underapplied
The difference between actual and applied manufacturing overhead
billable hours
The number of hours, or parts of an hour, that can be charged to a specific client. Similar to direct labor hours in a manufacturing setting.
cost of goods manufactured (or cost of goods completed)
The total manufacturing cost that is transferred out of Work in Process Inventory and into Finished Goods Inventory
volume-based cost system
This type of cost system uses a cost driver that is related to the volume of units produced or customers served. (e.i. Direct Labor Hours)
Source Documents
To keep records of direct cost for specific jobs. (Direct Labor and Direct Material)
average unit cost formula
Total cost of each process/ the number of units produced. Since these company's product these products that are similar they do not have to calculate the cost of each individual one. Process costing breaks the production process down into its basic steps
Job Order Costing
a costing system used in situations where many different products, jobs, or services are produced each period
Materials Requisition Form
a form that lists the quantity and cost of the direct materials used
Enterprise Resource Planning (ERP) Systems
a software system that integrates information from across the entire company, including finance, order fulfillment, manufacturing, and transportation, and then facilitates sharing of the data throughout the firm
Product-level activities
activities are performed for a specific product line or type of service offering.
Manufacturing Overhead
all manufacturing costs other than direct materials and direct labor. It includes all of the indirect costs involved in making a product that cannot be directly or conveniently traced to a specific job.
nonmanufacturing costs
are expensed during the period in which they are incurred.
Batch-level activities
are performed for a group or batch of units all at once.
Unit-level activities
are performed for each individual unit or customer.
Facility-level activities
are the most general category and are performed to benefit the organization as a whole, as opposed to specific products, customers, units, or batches.
Activity-based management (ABM)
encompasses all of the actions that managers take to improve operations or reduce costs based on ABC data.
non volume based cost driver
is an allocation base that is not strictly related to the number of units produced or customers served.
To compute the target cost:
is computed by subtracting the target profit from the market price,
Value-added activity
is one that enhances the perceived value of the product or service to the customer.
non-value-added activity
is one that, if eliminated, would not reduce the value of the product or service to the customer.
Direct Labor
is the hands-on work that goes into producing a product, the cost of which can be directly and conveniently traced to the product.
Value Chain
is the linked set of activities required to design, develop, produce, market, and deliver the product to customers, as well as after-market customer service.
supply chain
is the network of organizations and activities required to move goods and services from suppliers to consumers.
Cost of Goods Manufactured (Cost of Good Completed)
represent the total cost of all jobs completed during the period.
Finished Goods Inventory
represents the cost of jobs that have been completed but not yet sold.
Raw Materials Inventory
represents the cost of materials purchased from suppliers but not yet used in production. This includes both Direct and Indirect materials.
Work in Process Inventory
represents the total cost of jobs that are in process at any given point in time. Any cost that is added to the Work in Process Inventory account must also be recorded on an individual job cost sheet.
Direct Labor Time Ticket
source document that shows how much time a worker spent on various jobs each week
cost of quality report
that summarizes the costs incurred to prevent, detect, and correct quality problems.
Cost of Goods Sold (COGS)
total manufacturing cost of jobs or units sold during the period
gross profit, or profit before nonmanufacturing expenses
we subtract adjusted Cost of Goods Sold from sales revenue
A Cost of Quality Report should include:
• Prevention costs are incurred to keep quality problems from happening in the first place. • Appraisal or inspection costs are incurred to identify defective products before they get to the customer. • Internal failure costs result from the defects that are caught during the inspection process. • External failure costs occur when a defective product is discovered only after the product has made its way into the customer's hands.