EXAM TWO Flashcards
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Direct Materials + Direct Labor + Manufacturing Overhead
Total Manufacturing Cost
Estimated Overhead Costs / Estimated Operating Activity
Predetermined Overhead Rate
Estimated Overhead Per Activity / Estimated use of Cost Driver
Activity-Based Overhead Rate
Revenue – Cost of Goods Sold
Gross Profit
Type of managerial accounting that involves measuring, recording, and
reporting product and service costs
Cost Accounting
What are the two types of Cost Accounting?
Process Cost System & Job Order System
Businesses use Process Cost System when it manufactures…
Large volume of similar products
Costs are assigned to each job or batch in
Job Order System
True or False: Each job in Job Order Costing has its own distinguishing characteristics
True
Job Order Cost System’s Cost Flow
Raw Materials, Factory Labor, Manufacturing Overhead -> Assign costs to Work in Progress (WIP) -> Once job is completed put into Finished Goods -> once sold, move to Cost of Goods Sold (COGS)
To assign costs to WIP, what do you need to use?
Job Cost Sheet
How do companies assign factory labor costs to a job?
Time Tickets
Companies assign to work in process and to specific jobs on an estimated
basis using a…
Predetermined Overhead Rate
Predetermined Overhead Rate Equation
Estimated Annual Overhead Costs/Estimated Annual Operating Activity
Estimated Annual Operating Activity includes…
Direct Labor Costs, Direct Labor Hours, and Machine Hours
Predetermined Overhead Rate x Actual Labor Hours
Applied Overhead
A positive balance in manufacturing overhead (MOH Applied < Actual MOH)
Underapplied Overhead
A negative balance in manufacturing overhead (MOH Applied > Actual MOH)
Overapplied Overhead
True or False: Underapplied Overhead increases COGS
True
The overhead cost attributed to a distinct activity
Activity Cost Pool
Any factor or activity that has direct cause-effect relationship with the resources consumed
Cost Driver
Any event, action, transaction, or work that incurs costs when producing a product or performing a service
Activity
Benefits of Traditional Costing
- Allocates overhead using a predetermined rate
- Adopts direct labor hours as the relevant activity base
Limitations of Traditional Costing
- Decrease of Direct Labor usage
- Complex manufacturing processes may require multiple allocation bases
- Tremendous change in manufacturing and service industries
Benefits of ABC
- Employs more cost pools, which results in more accurate product costing
- Better control over overhead costs
- Allows better management decisions
Estimated Overhead per Activity/Estimated Use of Cost Drivers per Activity
Activity-Based Overhead Rate
Are performed for each unit of production
Unit Level Activities
Are performed each time a company
produces another batch of product
Batch Level Activities
Are performed every time a company produces a
new type of product
Product Level Activities
Activities performed to sustain or maintain an
entire production process. The costs do not vary as a function of the
number of units, batches or products
Facility Level Activities
Direct Labor Hours/Cost
Traditional Costing
Are operations that increase perceived value of a company’s
product or service to customers (ex. assembling and machining)
Value Added Activity
Only adds cost to a product or service. IF ELIMINATED, they
do not reduce the value of a company’s product or device. (ex. Inspection and Inventory)
Non-Value Added Activity
Steps of ABC
- Identify activity cost pools and allocate cost to pools
- Identify cost drivers and estimate total usage
- Compute activity-based overhead rate
- Assign overhead costs to products based on use of cost drivers
Three Important Elements of JIT Processing
- Dependable Suppliers
- Multi-skilled Work Force
- Total Quality Control System
Limitations of ABC
- More expensive than traditional systems
- More complex than traditional systems
- Costs may still be allocated
with incorrect cost drivers,
where inputs used may
change over time, or later
be identified as the
incorrect inputs
A Company has the right
amount of materials, parts, or
products just as they are
needed. The goal is a smooth,
continuous flow in the
manufacturing process with no
buildup of inventories at any
point.
Just in Time Processing
Major Benefits of JIT
- Significant reduction or elimination of manufacturing inventories.
- Enhanced product quality.
- Reduction or elimination of rework costs and inventory storage costs.
- Production cost savings from the improved flow of goods through the processes
Job Order + Process Cost System
Cost Accounting System
Actual - Applied =
Over/Under Applied Overhead
What do you get when you multiply the POH rate by Actual operating activity
Applied Overhead
