Accounting Managerial Chapter 3 (real)
What is the allocation base like in departmental overhead rate?
The allocation base depends on the nature of the work performed in each department. In the machining department, overhead may be based on machine-hours, but in the assembly department, overhead may be based on direct labor-hours.
Direct labor has often been used as the allocation base for overhead because
1) Direct labor information was already being recorded 2) Direct labor was a large component of product costs 3) Managers believed direct labor and overhead costs were highly correlated
When cost systems were developed in the 1800s, the emphasis was on simplicity because:
1) cost and activity data had to be collected by hand and all calculations were done with paper and pencil 2) Most companies produced a limited variety of similar products, so there was little difference in the overhead costs consumed by each product
why is it that today, direct labor may no longer be a satisfactory base for allocation of overhead with plant wide OH rate.
1) most companies sell a large variety of products that consume differing amounts of overhead. 2) As a percentage of total costs, direct labor has been shrinking and overhead has been increasing. Many of these growing overhead costs may not be correlated with direct labor. 3) Technology advancements have reduced the cost and complexity of gathering diverse sources of data
What is a departmental overhead rate
A departmental overhead rate is a standard charge based on the units of activity produced by a business segment. Overhead rates at the departmental level are usually applied in a more refined cost allocation environment, where there is a need to apply overhead costs as precisely as possible
What can you say about a plant wide overhead allocation system?
A plantwide overhead allocation system may not be optimal for many companies in todays business environment
How is predetermined overhead rate used?
A predetermined overhead rate is computed for each activity and then applied to jobs and products based on the amount of activity consumed by the job or product.
what is an activity in activity based costing?
An event that causes the consumption of overhead resources.
Activity-based costing is required to account for these other factors.
Departmental rates will not correctly assign overhead in situations where a company has a range of products and complex overhead costs. The departmental approach relies exclusively on volume-related allocation bases while some overhead costs may be caused by factors that are not related to the volume of production
What is the challenge behind designing an activity based costing system?
The challenge is to select a reasonably small number of activities that explain the bulk of the variation in overhead costs. Activities are usually chosen by interviewing a broad range of managers to ind out what activities they think consume most of the organizations resources. Related activities are frequently combined to reduce the amount of detail and record-keeping costs. For example, several actions maybe involved in handling and moving raw materials, but these may be combined into a single activity titled material handling.
