Cours 6

Question 1

What are the 2 methods to determine the selling price based on manufacturing cost? Give their formulas.

Answer 1

• Desired profit margin (%): profit/sales
• Cost-plus pricing: Profit/costs

Question 2

How do you calculate the desired profit margin (%)?

Answer 2

Manufacturing cost/(1-gross margin %)

Question 3

How do you calculate the cost-plus pricing margin (%)?

Answer 3

Manufacturing cost*(1+mark-up %)

Question 4

Is it easy to track the MOH to a particular product? Give examples.

Answer 4

Since they are indirect costs, they are difficult or impossible to trace to a particular product.

Question 5

What does the allocation process consist of?

Answer 5

• It consists of assigning a portion of MOH to each product in order to calculate a manufacturing cost.
• The goal is to tie indirect costs (MOH) evenly over time and across products.

Question 6

What is the predetermined overhead rate based on?

Answer 6

It is based on the relationship between the estimated annual overhead costs and the estimated annual operating activity. This relationship is expressed through a common activity base.

Question 7

What are the 4 steps of the allocation method?

Answer 7

1) Evaluate possible MOH activity bases.
2) Choose an allocation base.
2) Calculate the overhead rate.
4) assign overhead costs to products.

Question 8

Describe the first step in the process of the allocation method.

Answer 8

Allocation of overhead costs is accomplished by selecting an allocation base that is common to all company’s products and services. It can be stated in any measure that provides a fair basis for applying overhead costs.

Question 9

What can be concluded from the evaluation of possible allocation bases?

Answer 9

• When a company has a single product, the allocation base is equal to the units of the product.
• When a company has multiple products, which consume resources (MOH) in similar ways, the allocation base could be units of product.
• When there are several products, which consume resources (MOH) in different ways, we use other activity bases to reflect this reality.

Question 10

What are the criteria to choose an allocation base?

Answer 10

1) Analyze the manufacturing process (factors of production):
- See the description of the manufacturing process in the case text and/or analyze the manufacturing data table.
2) Link between allocation base and manufacturing overhead.
3) allocation base must be common to all products.
4) Data are available and understandable.

Question 11

What is the formula to use when calculating the overhead rate?

Answer 11

Annual overhead manufacturing costs/Annual operating activity

Question 12

What are the main steps to allocate MOH with multiple cost centers?

Answer 12

1) Identify cost centers.
2) Calculate overhead rates for each cost center.
3) Allocate manufacturing overhead to products.