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.