Lecture Two

Question 1

Job-order costing

Answer 1

Job-order costing is used in situations where many different products are produced each period
Ex
1. Many diffrent products are produced each period
2. Products are manufacturing to order
3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job

Question 2

Examples of companies using job-order costing

Answer 2

Boeing (aircraft manufacturing), Walt Disney studios

Question 3

Compute a predetermined overhead

Answer 3

An allocation base, such as direct labor hours, direct labor dollars, or machine hours, us used to assign manufacturing overhead to individual jobs.

Question 4

Why do we use allocations base?

Answer 4

a. It is impossible or difficult to trace overhead costs to particular jobs.

b. Manufacturing overhead consists of many different items ranging from the grease used
in machines to the production manager’s salary.

c. Many types of manufacturing overhead costs are fixed even though output fluctuates
during the period.

Question 5

Manufacturing overhead application

Answer 5

The predetermined overhead rate (POHR) used overhead to jobs is determined before the period begins

Question 6

POHR =

Answer 6

POHR =
estimated total manufacturing overhead cost for the coming period /
Estimated total units in the allocation base for the coming period

(Ideally the allocation base is a cost driver that causes overhead)

Question 7

The need for POHR

Answer 7

Predetermined overhead rates that rely upon estimated data are often used because:

1. Actual overhead for the period is not known until the end of the period, thus inhibiting
   the ability to estimate job costs during the period.
2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

Question 8

Overhead application rate

Answer 8

Y = a+bX

Y = estimates total fixed manufacturing overhead + (direct labor hour $ x direct labor hours)

POHR = Y (estimated total manufacturing overhead) / estimated direct labor hours = $ per direct labor hour

Question 9

Raw materials

Answer 9

Include any materials that go into the final product

Question 10

Work in process

Answer 10

Consist of units of production that are only partially complete and will require further work before they are ready for sale to customers

Question 11

Finished goods

Answer 11

Consists of completed units of product that have not been sold to customers

Question 12

Cost of goods manufactured

Answer 12

Include the manufacturing costs associated with the goods that were finished during the period

Question 13

Underapplied and overapplied overhead

Answer 13

The difference between the overhead cost applied to work in process ant he actual overhead costs of a period is referred to as either underapplied or overapplied overhead

Question 14

Underapplied overhead

Answer 14

Exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period

Question 15

Overapplied

Answer 15

Exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period

Question 16

Activity-based costing

Answer 16

A number of allocation bases are used for assigning costs to products.
Examples of companies: hotels or hospitals

• An ABC system can help identify areas where the company can benefit from
  improving its current processes.
• Activity-based management focuses on managing activities to eliminate waste and
  reduce delays and defects

Question 17

Benefits of ABC

Answer 17

ABC improves the accuracy of product costing by:
1. Increasing the number of cost pools used to accumulate overhead costs.

2. Using activity cist pools that are more homogeneous than departmental cost pools.
3. Assigning overhead costs using activity measures that cause those costs, rather than
   relying solely on direct labor-hours.
4. Activity-based costing also highlights activities that could benefit most from process
   improvement efforts.

Question 18

Difference between job-order and ABC

Answer 18

JOB-ORDER
Products - single
Volume - same
Activity- direct labor

ABC
Products - several
Volume - different
Activity - direct labor, manufacturing hours, setups