accounting chapter 17

departmental overhead rate formula

(total budgeted departmental overhead costs) / (total amount of departmental allocation base)

plantwide overhead rate formula

(total budgeted overhead costs) / (total budgeted DHL)

overhead application rate formula

(total estimated overhead costs) / (cost allocation base)

other uses of activity-based costing (ABC)

- allocate the S&A costs expensed by GAAP activities - determine profitability of market segments

disadvantages of departmental overhead rate method

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

disadvantages of activity-based costing

- costs to implement and maintain - some product cost distortion remains - uncertainty with decision remains

advantages of plantwide overhead rate method

- information is readily available - easy to implement - consistent with GAAP and can be used for external reporting

advantages of departmental overhead rate method

- more accurate overhead allocations - more refined than the plantwide overhead rate method

advantages of activity-based costing

- more accurate overhead cost allocation - more effective overhead cost control - better production / pricing decisions - costs of quality

disadvantages of plantwide overhead rate method

- with many different products, assumptions may not be reasonable - overhead costs may not bear a relationship with direct labor hours - all products may not use overhead costs in the same proportion

4 steps to applying activity-based costing:

1. identify activities and the costs they cause 2. trace overhead costs to cost pools 3. determine activity rates 4. assign overhead costs to cost objects (products)

product level activities:

are performed on each product line and are not affected by either the numbers of units or batches ; do not vary with the number of units or batches produced

unit level activities:

are performed on each product unit ; tend to change with the number of units produced

facility level activities

are performed to sustain facility capacity as a whole and are not caused by any specific product ; do not vary with what is manufactured, the number of batches produced, or the output quantity

product costs only include:

direct labor, direct materials and overhead (e.g., factory supervisor's salary, factory line worker's salary and manufacturing overhead costs)

product costs include:

direct labor, direct materials, overhead

lean accounting:

eliminates waste, uses alternative performance measures, and simplifies product costing

overhead

indirect costs not measurable AND identifiable; not directly related to production volume

batch level activities:

performed only on each batch or group of units ; do not vary with the number of units, but instead vary with the number of batches

direct material

physical components of a product

methods of overhead allocation include:

plant-wide, departmental, ABC

managerial activities include:

product pricing decisions, product mix decisions and cost control

overhead can be assigned to production in one of 3 ways:

single plant-wide overhead , departmental overhead rates , activity-based costing

types of activities that cause overhead costs

unit level, batch level, product level, facility level

direct labor

work to make the product