UFC1 Readiness questions
Disadvantages: departmental rate method
1. Can distort product costs 2. Assumes that products are similar in volme, complxity, and batch size 3. Assumes that departmental overhead costs are proportional to allocation base
Advantages of plantwide overhead rate are:
1. Information is readily available 2. Easy to implement 3. Often sufficient to meet external financial reporting needs
Advantages: deparmental rate method
1. More accurate overhad allocations 2. More refined than the plantwide overhead rate method
Advantages:
1. More accurate overhead cost allocation 2. More effective overhead cost control 3. Focus on relevant factors 4. Better management of actitivities 5. Cash assist in distiguishing value added actitivities
Disadvantage of plantwide overhead rate are:
1. Overhead cost may not bear any realtionship with direct labor hours 2. All products may not use overhead costs in the same proportion
This chapter introduces three methods of overhead allocation:
1. The single platwide overhead rate method 2. the departmental overhead rate method 3. the activity-based costing method
steps in weighted average cost flow
1.Determine the physical flow of units 2.Compute equivalent units of production 3. Compute the cost of equivalent unit 4. Assign and reconcile cost
Disadvantages:
1.costs to implement and maintain 2.uncertainty with decisions still remain
The basic principle underlying activity based costing is that activities, which are tasks, operations, or procedures, are what cause costs to be incurred.
A cost pool is a collection of costs that are related to the same or similar activity. Pooling costs to determine a pool rate for all costs incurred by the same activity reduces the number of cost assignments required.
What financial statement do product costs and period cost appear on?
A distinction between product and period costs is important because period costs are expensed in the income statement and product costs are assigned to inventory on the balance sheet until that inventory is sold.
Do you know what items are on a job cost sheet?
A job cost sheet is a separate record maintained for each job that is used to account for material, labor, and factory overhead costs for each job. The job cost sheet may be a paper record, but most likely it is a computerized file. Here's an example of a job cost sheet showing customer identification, job number, relevant dates, along with materials, labor, and overhead expenditures for the job.
Do you know the 4 control levels of ABC?
ABC accumulates costing overhead costs into activity pools and then allocates those costs to products using activity rates. This involves four steps: 1. Identify activities and the costs they cause. 2. Group similar activities into activity pools. 3. Determine an activity rate for each activity cost pool. 4. Allocate overhead costs to products using those activity rates.
formula for activity rate
Actitivity rate= total cost in actitivity pool/measure of actitivty
activity based costing
Activity - based costing (ABC) attempts to more accurately assign overhead costs to the proper users of overhead by focusing on activities. Let's look at two stages of activity based costing.
Do you know the general priciple of Activity Based costing - ABC
Attempts to more accurately assgin overhed costs to the users of overhead by focusing on activities. The basic underlying activity-based costing is that an activity, which is a task, operation, or proceure, is what causes costs to be incurred.
Do you know what the contribution margin represents?
Contribution margin goes to cover our fixed costs. If all our fixed costs are covered, the company will operate in the profit area. If we fail to cover our fixed expenses, we will operate in the loss area. How much contribution must this company have to cover its fixed costs?
Period Cost
Costs expensed are called period costsExpenditures identified more with a time period than with finished products costs; includes selling and general administrative expenses., which refer to expenditures identified more with a time period than with finished products. They include selling and general administrative expenses. Period costs pertain to activities that are not part of the manufacturing process.
Can you calculate the departmental overhead rate?
Departmental Overhead Rate = Total departmental overhead costs / Total unit number in department allocation base
Each department computes its own overhead rate using the following formula:
Departmental Overhead Rate = Total departmental overhead costs / Total unit number in department allocation base
Can you explain the difference between indirect labor and direct labor?
Direct labor is the effort of employees who actually convert materials into a finished product. Direct labor costs are the wages of direct labor employees. Direct labor costs can be separately and readily traced to the individual units of product being manufactured.
Do you understand what is meant by equivalent units?
Equivalent units is a term that refers to the number of units that would have been completed if all of the effort during a period had been applied only to the units started in that period. For example, four thousand units that are sixty percent complete would total two thousand four hundred equivalent units sixty percent of four thousand is two thousand four hundred
Do you know what things are included in Factory Overhead?
Factory overhead is all manufacturing costs other than direct material and direct labor. Factory overhead costs are indirect manufacturing costs that support the major manufacturing activities. As indirect costs, they cannot be separately and readily traced to the individual units of product.
Financial accounting
Financial accounting provides general purpose financial information to those who are outside the organizations
Do you know the differnce between fixed, variable & mixed costs
Fixed cost do not change with changes in the volume of activity
Can you explain how costs flow when using plantwide
For this method, the target of the cost assignment, or cost object, is the unit of product. The rate is determined using volume - related measures such as direct labor hours, direct labor cost dollars, or machine hours, which are readily available in most manufacturing settings.
There are four types of activities that cause overhead costs. One of the biggest challenges is to identify the activities which cause the costs to occur. This is mainly done through discussions with employees in production departments and reviewing production activities.
However, tracking too many activities makes the system cumbersome and costly to maintain. The aim of this first step is to understand actions performed in the organization that drive costs.
The break - even point in sales dollars is equal to fixed costs divided by the contribution margin ratio. The contribution margin ratio is equal to the unit contribution divided by the unit sales price.
In the earlier example, the contribution margin ratio is thirty percent, resulting from dividing the thirty dollars unit contribution margin by the one hundred dollars unit sales price. You might want to refer back to the example to verify these numbers. The contribution margin ratio tells us that thirty cents of each sales dollar contributes to covering fixed costs and providing for income
Can you calculate cost pool activity rate?
In this step the activity rate is determined by dividing the total cost in the activity pool by the basis or measure of activity.
Indirect Labor
Indirect laborEfforts of production employees who do not work specifically on converting direct materials into finished products and who are not clearly identified with specific units or batches of product. refers to manufacturing workers' efforts not linked to specific units or batches of the product.
Can you explain job costing
Job order costing is typically used by manufacturers of custom products or providers of custom services.
Do you know how managerial accounting is differnt from finanacial accounting
Managerial ccaounting provides financial and non-financial information for managers of an organization and other decision makers
Explain how balance sheets and income statements for manufacturing and merchandising companies differ.
Manufacturers carry several unique assets and usually have three inventories instead of the single inventory that merchandisers carry. Exhibit 1.10 shows three different inventories in the current asset section of the balance sheet for Rocky Mountain Bikes, a manufacturer. The three inventories are raw materials, goods in process, and finished goods.
formula for plantwide overhead
Plantwide overhead rate is equal to total budgeted overhead cost divided by total budgeted direct labor hours. Plantwide overhead reate=total budgeted overhead cost/total budgeted DLH (direct labor hour)
Can you calculate plantwide overhead rate?
Plantwide overhead reate=total budgeted overhead cost/total budgeted DLH (direct labor hour)
The basic principle underlying activity based costing is that activities, which are tasks, operations, or procedures, are what cause costs to be incurred. A cost pool is a collection of costs that are related to the same or similar activity.
Pooling costs to determine a pool rate for all costs incurred by the same activity reduces the number of cost assignments required.
Do you know what prime costs and convesion cost are?
Prime costs are direct labor and direct material
Do you know what the difference between product costs and period costs are?
Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred.
Can you explain the difference between indirect materials and direct materials?
Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials.
Can you calculate and assgin overhead costs to cost objects?
Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates. To accomplish this, overhead costs in each activity cost pool are allocated to product lines and then divided by the number of units of that product line to arrive at overhead cost per product unit.
Do you know why the predetermined overhead rate is used?
The term predetermined means that the overhead rate is computed before the operating period begins. Overhead costs and labor costs are estimated for the coming period as a part of the company's budgeting process.
Can you calculate overhead costs per unit?
The unit overhead costs is computed by dividing total overhead cost allocated to the product lines by the number of product units. Kartco's overhead cost per unit for it's standard and custom go - karts is computed and shown in Exhibit
Under the single plantwide overhead rate method, total budgeted overhead costs are combined into one overhead cost pool.
This cost pool is then divided by the chosen allocation base, such as total direct labor hours, to arrive at a single plantwide overhead rate. This rate then is applied to assign costs to all products based on the allocation base such as direct labor hours required to manufacture each product.
example equivalent units
To illustrate, assume that GenX adds (or introduces) 100 units into its process during a period. Suppose at the end of that period, the production supervisor determines that those 100 units are 60% of the way through the process. Therefore, equivalent units of production for that period total 60 EUP (100 units × 60%). This means that with the resources used to put 100 units 60% of the way through the process, GenX could have started and completed 60 whole units.
Example:
To illustrate, the $500,000 of overhead costs in the craftsmanship pool is allocated to standard go - karts as follows: Overhead allocated to standard go - kart = Activities consumed X Activity rate =25,000 DLH x $20 =$500,000
Do you know what total quality management and lean business is?
Total Quality Management focuses on quality improvement and applies this standard to all aspects of business activities. In doing so, managers and employees seek to uncover waste in business activities including accounting activities such as payroll and disbursements.
Cost equivalent unit formula
Total production costs for a production period are divided by the equivalent units produced for the period to get the cost per unit.... Cost Equivalent unit=product cost for the period/equivalent units for the period
Can you calculate break-en in units and dollars
We compute the break - even sales volume in units by dividing fixed costs by the unit contribution margin
Underapplied Overhead
When less overhead is applied than is actually incurred, the remaining debit balance in the Factory Overhead account is called underapplied overheadAmount by which overhead incurred in a period exceeds the overhead applied to that period's production using the predetermined overhead rate.
Overapplied Overhead
When the overhead applied in a period exceeds the overhead incurred, the resulting credit balance in the Factory Overhead account is called overapplied overheadAmount by which the overhead applied to production in a period using the predetermined overhead rate exceeds the actual overhead incurred in a period
text book definiton of equivalent units
a phrase that refers to the number of units that could have been started and completed given the cost incurred during a period. This measure is then used to compute the cost per equivalent unit and to assign costs to finished goods and goods in process inventory.
Variable cost
changes in proportion to changes in the volum of activity
Conversion costs are
direct labor and manufacturing overhead
mixed cost
does not change with the volume of activity
Can you explain job costing?
is the mass production of products in a continuous flow of steps. This means that products pass through a series of sequential processes.
Oertime paid to direct laborers is also included in overhead because overtime is due to delays, interruptions, or constraints not necessarily identifiable to a specific product or batches of product. Factory overhead costs also include maintenance of the mountain bike factory, supervision of its employees,
repairing manufacturing equipment, factory utilities (water, gas, electricity), production manager's salary, factory rent, depreciation on factory buildings and equipment, factory insurance, property taxes on factory buildings and equipment, and factory accounting and legal services.
1st stage of departmental overhead rate method
the departments are the cost objects. The first stage requires that KartCo assign its $4,800,000 overhead cost to its two production departments
2nd stage
the products are the cost objects. The second stage demands that after overhead costs are assigned to its departments, each department determines an allocation base for its operations.
deparmenttal overhead rate method
uses a different overhead rate for each production department. This is usually done through a two-stage assignement process, each with its diffrent cost object
Lean business
whose goal is to eliminate waste while "satisfying the customer" and "providing a positive return" to the company.
