55. Variable & Fixed Overhead Costs Flashcards
1
Q
Briefly describe the four stages that many organizations use to allocate or track costs, resulting in a fully costed product that complies with absorption costing standards.
A
- Stage 1: The direct costs are located within each department.
- Stage 2: The executive-level administrative costs are allocated across all departments.
- Stage 3: The support department costs are assigned to production departments.
- Stage 4: Fully loaded costs from the production departments are assigned to products sold.
2
Q
Describe how organizations use the high–low method to estimate the variable and fixed costs.
A
- The high–low method focuses solely on the highest and lowest activity levels (e.g., production volume).
- Organizations compare the change in production costs to the change in activity level at these two points to establish a variable cost per unit (rise over run).
- The variable cost per unit is then used to solve for the total fixed costs by using the formula: Total Cost = (Variable cost per unit × Total units) + Total fixed costs.
3
Q
Describe how organizations use regression analysis to estimate the variable and fixed costs.
A
- Regression analysis is based on all the data provided in a report. Because it uses all the data points instead of just two, regression analysis is a much more comprehensive approach to identifying variable and fixed costs.
- Using Excel™, a line is fitted as tightly as possible to the data points.
- The coefficient or slope of the line (rise over run) represents the variable cost per unit.
- The coefficient for the intercept point represents the total fixed costs.
4
Q
Describe the basic approach that organizations use to establish the cost assignment or allocation rate.
A
- Identify the overhead cost pool and establish a budgeted cost for the upcoming period.
- Identify the basis on which to assign the costs and establish an expected activity level for the upcoming period.
- Divide budgeted costs by expected activity to form the cost assignment rate
5
Q
Describe the two approaches for reconciling over- or under-applied manufacturing overhead.
A
- One method is to proportionally adjust the ending balance in all “downstream accounts.” This is the most accurate approach and is the best method to use when the over- or under-applied amount is significant.
- The second method is to simply adjust the cost of goods sold account directly for the full amount of the variance. This method will over-adjust the cost of goods sold and leave inaccuracies in the ending balances for all inventory accounts