Managerial Accounting Exam 2

advantages of plantwide

a. Based on readily available information. b. Easy to implement. c.Consistent with GAAP and can be used for external reporting needs.

the departmental O/H rate method assumes that:

a. Different products are similar in volume, complexity, and batch size, and b. Departmental overhead costs are directly proportional to the department allocation base.

usefullness of single plantwide O/H rate depends on 2 assumptions:

a. Overhead costs change with the allocation base. b.All products use overhead costs in the same proportions.

Plantwide Overhead Rate Method

--Target of the cost object is the unit of product. --The rate is determined using a volume-related measure such as direct labor hours or machine hours. --For industries where overhead costs are closely related to these volume-related measures, it is logical to use this method to allocate indirect manufacturing costs to products.

disadvantages of departmental

--assumes that products are similar in volume, batch size, and complexity --assumes that departmental overhead costs are proportional to the allocation base --can distort product costs

advantages of departmental

--more accurate overhead allocation --more refined than plantwide

differences between ABC and multiple Departmental Rates

1. ABC recognizes that overhead costs are complex and emphasizes activities and costs of these activities. 2. ABC better reflects the complex nature of overhead costs and how these costs are used in making products.

disadvantages of ABC

1. Costs to Implement and Maintain ABC. Collecting and analyzing cost data are expensive and so is maintaining an ABC system. 2. Some Product Cost Distortion Remains. Even with ABC, product costs can be distorted because some costs cannot be readily classified into ABC cost pools and some cost drivers might not have a strong cause-effect relation with the costs in some pools. 3. Uncertainty with Decisions Remains. Managers must interpret ABC data with caution in making managerial decisions. Managers must examine carefully the controllability of costs before making decisions.

advantages of ABC

1. More Accurate Overhead Cost Allocation - because (1) there are more cost pools and activity rates than other methods. 2. More Effective Overhead Cost Control - can be used to identify activities that can benefit from process improvement by focusing on activities instead of focusing only direct labor or machine hours. 3. Better Production and Pricing Decisions - can reduce cost distortions. 4. Other Uses - ABC has uses beyond determining product costs. ABC can be used to allocate selling and administrative costs expensed by GAAP to activities, and to determine the profitability of various market segments or customers. 5. Activity-based management: Understanding the four levels of overhead costs is a first step toward controlling costs. Activity-based management is an out-growth of ABC that uses the link between activities and costs for better management. Activity-based management can be useful in distinguishing value-added activities which add value to a product from non-value-added activities, which do not. costs of quality

Activity-based costing

Activity-based costing accumulates overhead costs into activity cost pools and then allocates those costs to products using activity rates.

decision analysis

Customer Profitability. Companies cause the ABC method to analyze their customer profitability. ABC encourages management to consider all resources consumed to serve a customer, not just manufacturing costs that are the focus of traditional costing methods.

Assigning Overhead costs

Overhead costs cannot be traced directly to units of product in the same way that direct labor and direct materials can. Therefore, we must assign such overhead costs using an allocation system.

applying the departmental overhead rate method--4 steps

Step 1: Assign overhead costs to departmental cost pools. Step 2: Select an allocation base for each department. If overhead costs are common to several departments, companies must allocate overhead to departments applying reasonable allocation bases. Each department determines an allocation base for its operations. Step 3: Compute overhead allocation rates for each department. Step 4: Use departmental overhead rates to assign overhead costs to each product.

steps for ABC

Step 1: Identify Activities and the Costs They Cause Step 2: Assign activities and their overhead costs to activity cost pools. Step 3: Compute activity overhead (cost pool) rates used to assign overhead costs to find cost objects such as products. Proper determination of activity rates depends on: --Proper identification of the factor that drives the cost in each activity cost pool and --Proper measures of activities. Step 4: Assign overhead costs in each activity cost pool to cost objects using activity rates. Overhead costs are allocated to products based on the actual levels of activities used.

Applying the plantwide overhead rate method

a. Total budgeted overhead costs are divided by the chosen allocation base to arrive at a single plantwide overhead rate. b.This rate is then applied to assign overhead costs to all products based on the allocation base such as direct labor hours required to manufacture each product.

Cost flows under departmental overhead rate method

a. Use of multiple overhead rates can result in better overhead cost allocations and improve management decisions. b. The departmental overhead rate method uses a different overhead rate for each production department. This is usually done through a two-stage assignment process where departments are the cost objects in the first stage and products are the cost objects in the second stage. c. Overhead costs are first determined separately for each production department. Then an overhead rate is computed for each production department to allocate the overhead. d. This method allows each department to have its own overhead rate and its own allocation base.

activity cost pool

collection of costs that are related to the same or similar activity. homogenous activities are grouped in cost pools to reduce the number of activities.

costs of quality

costs resulting from manufacturing defective products or providing services that do not meet customer expectations. Costs of quality include prevention, appraisal, internal failure and external failure costs. Can be summarized in a cost of quality report

lean operations

focusing on activities is common in lean manufacturing which strives to eliminate waste while satisfying customers. Common features include: 1. Just-in-time (JIT) inventory systems to reduce costs of moving and storing inventory. 2. Cellular manufacturing where products are made by teams of employees in small workstations called cells. 3. Building quality into products by focusing on costs of good quality. 4. Lean accounting includes eliminating waste; alternative performance measures; and simplified product costing.

disadvantages of plantwide

overhead costs are too complex to be explained by one factor like direct labor or machine hours. --with many different products, assumptions may not be reasonable --overhead costs may not bear a relationship with DL hours --all products may not use overhead costs in the same proportion

Product-level activities

performed on each product line and are not affected by either the number of units or batches. Costs do not vary with the number of units or batches. -designing modifications, organizing production, controlling inventory -modifying custom go kart design

Unit-level activities

performed on each product unit. Costs tend to change with the number of units produced -cutting parts, assembling components, printing checks -cutting steel for go kart frames, painting go karts

batch level activities

performed only on each batch or group of units. Costs do not vary with the number of units, but with the number of batches. -calibrating machines, receiving shipments, sampling product quality, recycling hazardous waste -receiving shipment of tires, setting up machines for production, recycling hazardous waste

facility level activities

performed to sustain facility capacity as a whole and are not caused by any specific product. Costs do not vary with what is manufactured, number of batches, or the output quantity. -cleaning workplace, providing electricity, providing personnel support, reducing greenhouse gas emissions

ABC for service providers

the only requirements are the existence of costs and demand for reliable cost info

types of activities

unit level, batch level, product level, facility level

Departmental Overhead Rate Method

use of a single plantwide overhead rate can produce cost assignments that do not reflect the cost to manufacture products.