L3 Job Costing, Activity-Based Costing, Allocation of Support-Department Costs Flashcards
Total cost of a product
sum of direct and indirect costs
What is cost allocation?
the assignment of indirect costs to products through the use of cost drivers
What is the importance of cost allocation?
The importance increases, as in many sectors direct material and labor costs are decreasing while overhead costs are increasing. These overhead costs need to be assigned via cost allocation
What is used for the cost allocation?
a cost pool
Three components of a costing system
- Cost Accumulation Method
- Cost Measurement Method
- Overhead Application Method
Which choice do we have to make with the cost accumulation method?
At which level of detail do we want to accumulate production costs?
- job or process costing
Which choice do we have to make with the cost measurement method?
How do we measure costs?
- actual, normal or standard costing
Which choice do we have to make with the overhead application method?
How do we apply overhead costs to products?
- volume-based or activity based?
What is the cost object in job-costing?
the cost object is a unit or multiple units of a distinct product, service or project called a job
Which firms use job costing?
construction companies, printing shops, custom furniture-manufacturing plants, law firms, advertising agencies
What is process-costing?
Here the cost object are masses of identical or similar units
What problem arises when you have multiple, different product but allocate costs based on a volume-based cost driver, such as production volume?
Production volume as a cost driver charges each product the same amount of overhead
How does the Volume-based approach allocated overhead?
Based on a single volume-based cost driver
Should the volume-based approach measure the cost driver based on output or input?
It should measure based on input factors such as direct labor hours or machine hours. Overhead in each product should be proportional to direct labor hours or machine hours needed to manufacture that unit. When it is based on output (# units produced) then different amount of overhead required for different products is not accounted for.
How does the ABC approach allocate overhead?
overhead is allocated based on cause-and-effect relationships with multiple cost drivers
when is overhead under-allocated?
If allocated overhead < actual overhead
when is overhead over-allocated?
If allocated overhead > actual overhead
How can the difference in predetermined and actual overhead be accounted for?
by the proration approach and the write-off approach
Proration approach
The difference is allocated between COGS, WIP and finished goods based on their relative sizes
Write-off approach
the difference is simply written off to COGS
What are the limitations of the volume based approach?
Limitations is that it is assumed that the overhead costs are proportional to product’s usage of direct cost driver. However, indirect costs do not always occur in proportion to output volume
What does activity-based costing do well in comparison to volume-based costing
It splits up heterogeneous overhead into smaller pools of homogeneous costs.
Does the traditional volume-based approach allocate too much or to little overhead to high volume products?
- it allocates too much overhead to high volume products
- it allocates too little value to low volume products
What is overcosting?
a product consumes a low level of resources but is allocate high costs per unit
What is undercosting?
When a product consumers high levels of resources but is allocated low costs per unit
What does the production (operating) department do?
It directly adds value to a product
What do support (service) departments do?
They provide the service that assist other departments in the company
How do we allocate costs of support departments to production departments?
There are three methods, increasing in complexity:
- Direct method
- Step-down method
- Reciprocal method
How does the direct method work?
- Allocates support costs only to production departments
- does not allocate support-department costs to other support departments
Step-down method
- allocates in a sequential manner and partially recognizes provision of mutual services
- usually begin with the supporting department that gives highest percentage of services to other supporting departments (or with highest cost)
Reciprocal Method
allocates costs by fully recognizing the mutual services provided among all support departments
