Chapter 2

Question 1

When are Job-order costing systems used?

Answer 1

• Many different products are produced each period.
• Products are manufactured to order.
• The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Question 2

Why use an Allocation Base?

Answer 2

We use an allocation base because:

• It is impossible or difficult to trace overhead costs to particular jobs.
• Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
• Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Question 3

Why use a Predetermined Overhead Rate (POHR)?

Answer 3

• Actual overhead for the period is notknown until the end of the period, thus inhibiting the ability to estimate job costs during the period.
• Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

Question 4

What is a Plantwide Overhead Rate?

Answer 4

Many companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours.
- It is often overly-simplistic and incorrect to assume that direct-labor hours is a company’s only manufacturing overhead cost driver.
0 If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.

Question 5

What is Activity Based Costing?

Answer 5

When a company creates overhead rates based on the activities that it performs, it is employing an approach called activity-based costing.

Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.