Chapter 2

What is a plantwide overhead rate? Why are multiple OH rates, rather than a plantwide OH rate, used in some companies?

A plantwide overhead rate is a single overhead rate used throughout a plant. In a multiple overhead rate system, each production department may have its own predetermined overhead rate and its own allocation base. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive.

If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?

Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.

What is absorption costing?

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

What is job order costing?

Job-order costing is used in situations where many different products, each with individual and unique features, are produced each period

Would you expect the amount of applied overhead for a period to equal the actual overhead costs of the period? Why or why not?

No, you would not expect the total applied overhead for a period to equal the actual overhead for that period. This is because the applied overhead relies on a predetermined over- head rate that is based on estimates in the numerator and denominator.

What is normal costing?

Normal costing systems apply overhead costs to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation incurred by the job.

Explain why some production costs must be assigned to products through an allocation process.

Some production costs such as a factory manager's salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products.

Explain the four-step process used to compute a predetermined overhead rate.

The first step is to estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. The second step is to estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. The third step is to use the cost formula Y = a + bX to estimate the total manufacturing overhead cost (the numerator) for the coming period. The fourth step is to compute the predetermined overhead rate.

What is the purpose of the job cost sheet in a job-order costing system?

The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost

What factors should be considered in selecting an allocation base to be used in computing a predetermined overhead rate?

The measure of activity used as the allocation base should drive the OH cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted

How is the unit product cost of a job calculated?

Unit product cost is computed by taking the total manufacturing costs assigned to a job and dividing it by the number of units contained in the job.

What is underapplied overhead? Overapplied overhead?

When a company applied less overhead to production than it actually incurs, it creates what is known as under applied overhead. When it applies more overhead to production than it actually incurs, it results in over applied overhead.

Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?

if If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or variations in output. For this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs.