Ch7: a closer look at overhead costs Flashcards
Define Manufacturing overhead costs
all costs to manufacture excluding direct materials and direct labour. They cannot be economically traced to individual products.
Define non manufacturing costs
all costs incurred outside of manufacturing e.g. marketing, HR, customer support etc.
What are cost pools and how are they used?
where costs cannot be directly traced, they need to be allocated into cost pools. Activities are allocated to cost objects with a common allocation base (same cost driver).
What are the three factors that determine cost allocation?
- what is the major factor that causes the overhead cost to be incurred?
- to what extent does the overhead cost vary in proportion with the cost driver?
- how easy is it to measure the cost driver?
What value does allocating overhead costs provide?
- what products should be produced?
- what prices should be charged?
- how profitable are particular product lines?
- what value are inventoried goods?
What are the two methods for allocating costs in process costing?
- Plant wide rate: one cost pool and one cost driver
- Departmental rates: allocated based on each department use of overheads. Separate cost drivers for each department.
What are three steps for plant wide cost rates to be calculated?
- identify overhead cost driver
- calculate the overhead rate per unit of cost driver
- apply manufacturing overhead cost to product based on the predetermined overhead rate and product’s actual consumption of the cost driver
What is the two stage process to calculate departmental rates?
Stage one: overhead costs assigned to production departments in different cost pools
- overhead costs allocated to all departments
- support department costs are reassigned to overhead cost pools in the production departments
Stage two: overhead costs applied to products
- manufacturing overhead rates are calculated for each production department.
What are the three methods to allocate support department costs?
- Direct: support department costs allocated directly to production departments
- Step-down: partially recognises the services provided by one support department to another
- Reciprocal services: fully recognises the provision of services between support departments.
How are costs allocated using the direct method for support departments?
Support department costs directly allocated to production departments. Ignore the support the supporting departments provide to each other.
What are the steps in the step down method for support department cost allocation?
- allocate the costs of support department that provides the bigger number of services to other departments
- then allocate costs of second support department (inclusive of costs from first support department)
- follow pattern to allocate to production departments only
If not specified - allocate first support department which provides services to greatest number of other departments. If there is a tie allocate department with biggest overhead budget.
What are steps of reciprocal method of support department cost allocation?
- simultaneously allocate costs among support departments
- then allocate these revised support costs from step 1 to production departments
specify equations for total operating costs of each support department and then solve as simultaneous equations.
When is the direct method of cost allocation suitable?
Direct method used when cost of obtaining data on support service between departments is too high.
When is the reciprocal method of cost allocation suitable?
Where there are strong reciprocal relationships between departments, that method is appropriate.
Contrast ABC vs departmental rate costing.
Departmental: high volume, simple products are over costed, low volume, complex products are under costed.
ABC - more accurate and useful information but complex and costly to operate.
