Allocation of costs

Question 1

What is product costing?

Answer 1

Process of assigning costs to products and services provided by a company

Question 2

What is a job order costing?

Answer 2

1) Used for many different products produced each period and costs traced/ allocated to jobs while maintaining cost records.
2) Direct material/labour are traced directly to each job while the manufacturing overhead is applied to each job using a predetermined rate.

Question 3

How do we apply a POHR(predetermined overhead rate)

Answer 3

1) The POHR used to apply overhead is determined before the period begins.
2)The only way to assign overhead costs to products is through an allocation base that’s common to all company’s products and services such as Direct Labour Hours/ machine hours.

Question 4

Why is a POHR needed?

Answer 4

1) Using a predetermined rate makes it possible to estimate total job costs sooner.
2) Actual overhead for the period isn’t the end of the period.

Question 5

What’s the formula for POHR?

Answer 5

Est total MOH cost for coming period/Est total units in allocation base for coming period

Note: Allo base should be a cost driver that causes overhead.

Question 6

What’s the formula for Overhead applied?

Answer 6

POHR*Actual Activity(amount of cost driver eg units produced, DLH/MHR

Question 7

What methods are used to allocate costs in interdepartmental services?

Answer 7

1) Direct Method
2) Step Method
3) Reciprocal Method