Chapter 2 Managerial Accounting

multiple predetermined overhead rate

cost system with multiple overhead cost pools and a different predetermined overhead for each pool rather than a single predetermined overhead rate for the entire company. each production department treated as a separate pool.

which of the following would be considered direct materials in a service firm that uses job-order costing?

paperwork in a law firm

job cost sheet

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

If an actual rate is computed monthly or quarterly

seasonal factors in overhead costs or in the allocation base can produce fluctuations in the overhead rate. Ex. the costs of heating and cooling a factory in Illinois will be highest in the winter and summer months and lowest in the spring and fall.

When the allocation base is direct labor-hours, the overhead application formula becomes:

Overhead applied to a particular job= Predetermined overhead rate×Actual direct labor-hours worked on the job

activity-based costing

an approach where company creates overhead rates based on activities that it performs, it is

overapplied overhead

applies more overhead to production than it actually incurs.

normal cost system

applies overhead costs to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the jobs.

companies assign costs to products and services to

- establish selling prices - understand product profitability - value ending inventory

plantwide overhead rate

a single predetermined overhead rate that is used throughout a plant

The Production Department then prepares a

materials requisition form

the average manufacturing overhead cost per unit tends to

vary from one period to the next

subsidiary ledger

when all of a company's job cost sheets are viewed collectively they form

production order

when an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order

manufacturing overhead cost

1. consist of many different items 2. are indirect costs

Managers may also use job cost information to make pricing decisions

Ex. if Job A has a total manufacturing cost of $100, managers often use a predefined markup percentage, say 50%, to establish a markup of $50 (= $100 × 50%) and a selling price of $150 (= $100 + $50). Under this approach, known as cost-plus pricing, the 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.

cost driver

a factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

allocation base

a measure such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services. The most widely used allocation bases in manufacturing are direct labor-hours, direct labor cost, machine-hours, and (where a company has only a single product) units of product.

job cost sheet

accumulates total direct materials, direct labor, and manufacturing overhead costs assigned to a job.

absorption cost

all manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs. Conversely, all nonmanufacturing costs are treated as period costs and they are not assigned to units of product.

true or false: job-order costing can only be used in manufacturing firms

false

predetermined overhead rate

four steps: 1. computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base as follows: Predetermined overhead rate=Estimated total manufacturing overhead cost/Estimated total amount of the allocation base 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 shown below to estimate the total manufacturing overhead cost (the numerator) for the coming period: Y=a+bX. where, Y= The estimated total manufacturing overhead cost a= The estimated total fixed manufacturing overhead cost b= The estimated variable manufacturing overhead cost per unit of the allocation base X= The estimated total amount of the allocation base 4. compute the predetermined overhead rate.

bill of materials

is a document that lists the quantity of each type of direct material needed to complete a unit of product.

materials requisition form

is 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.

time-ticket

is an hour-by-hour summary of the employee's activities throughout the day.

job-ordering costing

is used in situations where many different products, each with individual and unique features, are produced each period. Ex. a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 boot-cut men's blue denim jeans, style number A312. This order of 1,000 jeans is called a job. Costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit. This average cost per unit is also referred to as the unit product cost.

the manufacturing overhead account contains

many different kinds of indirect costs

companies that use job-order costing system make

many different products

the amount of overhead applied to a particular job is

not the actual amount of overhead caused by the job. Actual overhead costs are not assigned to jobs—if that could be done, the costs would be direct costs, not overhead.

While job-order costing systems can accurately trace direct materials and direct labor costs to jobs, they often fail to accurately allocate

the manufacturing overhead costs used during the production process to their respective jobs. The root cause of the problem often relates to the choice of an allocation base.

If the overhead rate is recomputed at the end of each month or each quarter based on actual costs and activity

the overhead rate would go up in the winter and summer and down in the spring and fall.

overhead application

the process of assigning overhead cost to jobs. the formula: Overhead applied to a particular job=Predetermined overhead rate×Amount of the allocation base incurred by the job

underapplied overhead

when company applies less overhead to production than it actually incurs