ACC 220 Chapter 2

Reasons for Predetermined Rate

1. Actual rates computed monthly or quarterly, seasonal factors in overhead costs or in allocation base can produce fluctuations in the overhead rate; many managers believe that such fluctuations in product costs serve no useful purpose 2. Actual rates can be computed can only be computed annually so the manufacturing overhead assigned to any particular job would not be known until the end of the year

Reasons for Managers using Job Cost Information

1. Establish plans and make decisions 2. Job profitability reports to develop sales and production plans for next year 3. To make pricing decisions; establish a markup percentage that will generate enough revenue to cover all of a job's manufacturing costs and a portion of the company's on manufacturing costs while generating some residual profit 4. If job-costing system does not accurately assign manufacturing costs to jobs, it will adversely influence the types of planning and decision making scenarios above (could be due to not accurately allocate the manufacturing overhead costs because of wrong choice in allocation base)

3 circumstances for why assigning manufacturing overhead to a specific job is complicated

1. Manufacturing overhead is an indirect cost which means it is either impossible or difficult to trace these costs to a particular job or product 2. Manufacturing overhead consists of many different types of costs ranging from the grease used in machines to the annual salary of the production manager. Some of these costs are variable overhead costs because they vary in direct proportion to changes in the level of production (indirect materials, supplies, and power) and some are fixed overhead costs because they remain constant as the level of production fluctuates (heat and light, property taxes, and insurance) 3. Many companies have large amounts of fixed manufacturing overhead. Therefore their total manufacturing overhead costs tend to remain relatively constant from one period to the next even though the number of units that they produce can fluctuate widely. Consequently the average cost per unit will vary from one period to the next.

Assigning manufacturing overhead to a specific job is complicated by all of the below except: A. Manufacturing overhead is incurred to only support some jobs B. The average cost of actual fixed manufacturing overhead expenses will vary depending on how many units are produced in a period C. Manufacturing overhead consists of both variable and fixed costs D. Manufacturing overhead is an indirect cost that is either impossible or difficult to trace to a particular job

A

Absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.

Materials requisition form

A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials; used to control the flow of materials into production and also for making journal entries in the accounting records

Cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs; improves job cost accuracy; if the base in the predetermined overhead rate does not "drive: overhead costs, it will not accurately measure the cost of overhead resources used by each job

Allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign overhead costs to products and services; Direct labor-hours, direct labor cost, machine-hours, units of product (if company has only a single product)

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 amount of the allocation base for the period

What would usually be found on a job cost sheet under a normal cost system?

Actual direct material cost. Not Actual manufacturing overhead cost

Unit product cost

Average cost per unit; the costs of the job divided by the number of units in the job

Actual overhead costs are:

Not assigned to jobs in a job costing system

4 step predetermined overhead rate process

Step 1: estimate the total amount of the allocation base (denominator) that will be required for next period's estimated level of production Step 2: estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base Step 3: use the cost formula to estimate the total manufacturing overhead cost (numerator) for the coming period (Y=a+bX) Step 4: compute the predetermined overhead rate

Subsidiary ledger

When all of a company's job cost sheets are viewed collectively

Job-order costing

a costing system used in situations where many different products, jobs, or services are produced each period; 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; used extensively in service industries

Bill of materials

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

Plantwide overhead rate

a single predetermined overhead rate that is used throughout a plant; overly simplistic and not as accurate as multiple predetermined overhead rates

Time ticket

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

Normal cost system

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

Overhead application

process of assigning overhead cost to jobs; predetermined overhead rate multiplied by amount of allocation base incurred by the job

Job cost sheet

records the materials, labor, and manufacturing overhead costs charged to that job; after a production order has been issued

Incremental cost

the additional total cost incurred for an activity

Multiple predetermined overhead rates

uses more than one overhead rate to apply overhead costs to jobs; more complex; more accurate because it reflects differences across departments in terms of how jobs consume overhead costs

Underapplied Overhead

when a company applies less overhead to production than it actually incurs; adjustment increases cost of goods sold and decreases net operating income

Overapplied Overhead

when a company applies more overhead to production than it actually incurs; adjustment decreases cost of goods sold and increases net operating income