ACCOUNTING CHAPTER 18
Factory overhead includes indirect costs that must be allocated to
the product
Single Plantwide Factory Overhead Rate Formula
total budgeted factory overhead / total budgeted plant wide allocation base
The direct materials and direct labor are direct costs that can be
traced to the product
Activities are
types of work, or actions, involved in a manufacturing or service process.
Product Costing
Determining the cost of a product
3 methods to allocate factory overhead
single multiple activity based costing
Each production run requires a
setup *changing tools in machines to prepare for new products
Advantage of single rate
simple and inexpensive
Disadvantage of single rate
*assumes that the factory overhead costs are consumed in the same way by all products *if a factory consumes FOH in different ways, it may not accurately allocate FOH costs to the product
Conditions indicate that a single rate may cause product cost distortion are: (2)
*differences in production department factory overhead rates *differences among products in the ratios of allocation base usage within a department and across departments
One method of allocating selling and administrative expenses to the products is based on
*sales volume *However, products may consume activities in ways that are unrelated to their sales volumes. *When this occurs, activity-based costing may be a more accurate method of allocation.
Production Department factory overhead rate
Budgeted Department Factory Overhead / Budgeted Department Allocation Base
In ABC departments are identified as
activities *things initially allocated to departments are now there own activities
Under ABC factory overhead costs are initially budgeted for
activities sometimes called cost pools such as machine usage, inspection, moving production setups etc.
activity rate formula
budgeted activity cost / total activity-base usage
Warranty claim activity rate
budgeted warranty claim expenses/ total estimated warranty claim
Choice of allocation is important because the allocation affects
product cost
activity-based costing (ABC) method
provides an alternative approach for allocating factory overhead that uses multiple factory overhead rates based on different activities
multiple production department factory overhead rate method
different rates for each production department to allocate factory overhead costs to products.
Common allocation bases would include (3)
direct labor hours direct labor dollars machine hours
Product Costs consist of
direct materials, direct labor, factory overhead
Engineering Change Order (ECO)
document that initiates changing a product or process
Single Plantwide Factory Overhead Rate
factory overhead costs are allocated to products using only one rate.
Allocation base is a measure of
operating activity in the factory
Generally accepted accounting principles (GAAP) require that selling and administrative expenses be reported as
period expenses on income statement *however can still be allocated for decision making