Semester 1 Week 2b PP (Cost Assignment, Job Costing and Overhead Application) Flashcards
What are Cost centre overhead rates?
Where a department contains a number of different centres (each with significant overhead costs) and products consume overhead costs for each centre in different proportions, separate overhead rates should also be established for each centre within a department.
To establish departmental or cost centre overhead rates a two-stage allocation procedure is required:
Stage 1 – Assign overheads initially to cost centres.
Stage 2 – Allocate cost centre overheads to cost objects (e.g., products) using second stage allocation bases/cost drivers.
The terms cost centres or cost pools are used to describe a location to which overhead costs are initially assigned.
Frequently cost centres/cost pools will consist of departments but they can also consist of smaller segments within departments.
Within the two-stage allocation process ABC systems differ from traditional systems by having a greater number of cost centres in the first stage and a greater number, and variety of cost drivers or allocation bases in the second stage.
What are the different types of departments?
Nearly every company or factory has producing departments and support departments
Producing departments are directly responsible for creating the products or services sold to customers
Example: A public accounting firm might have producing departments devoted to auditing, tax, and management advisory services
In a factory, producing departments are those that work directly on the products being manufactured, such as the grinding and assembly departments
Support departments provide essential services for producing departments, but they do not actually make the product or service being sold
Examples include the maintenance, grounds, engineering, housekeeping, personnel, and photocopying departments.
Assigning Costs of Multiple Support Departments Using the Direct Method.
Direct Method:
All factory costs must be included in product cost.
Since support departments do not make the product sold, their costs would not be added to unit cost if they were not included in the cost of producing departments
The direct method is the quickest and easiest way to do this.
The direct method is the simplest and most straightforward way to assign support department costs. The direct method ignores support department interactions and assigns support department costs only to the producing departments. The direct method ignores support department interactions and assigns support department costs only to the producing departments. No cost from one support department is given to another support department. As this second image shows, no support department interaction is recognized.
How to Assign Support Department Costs by Using the Direct Method
What is the Two-Stage Process for A Traditional Costing System?
Manufacturing Company
Aim: calculate product costs that are required for inventory valuation and profit measurement purposes.
Five Cost Centres: Machine Department X and Y, an assembly department and materials handling and general support cost centers.
Specific steps of the two-stage allocation process :
1. Assigning all manufacturing overheads to production and service cost centres.
2. Reallocating the costs assigned to service cost centres to production cost centres.
3. Computing separate overhead rates for each production cost centre.
4. Assigning cost centre overheads to products or other chosen cost objects.
Steps 1 and 2 comprise stage one and steps 3 and 4 relate to the second stage of the two-stage allocation process. Note that in the third stage above traditional costing systems mostly use either direct labour hours or machine hours as the allocation bases.
The Overhead Costs data:
The annual overhead costs for the three production centres and the two service centres (Materials procurement and General factory support) are..
Exampel stuff in answer.
Step 1: Assigning all manufacturing overheads to production and service cost centres.
Indirect labour and indirect material costs have been directly traced to cost centres.
Although these items cannot be directly assigned to products they can be directly assigned to cost centres.
In other words, they are indirect costs when products are the cost objects, and direct costs when costs centres and the cost object.
First-stage allocation bases: How the benefit of each cost centre is ascertained?
Overhead Analysis Sheet:
The annual overhead costs for a company which has three production centres and two service centres (Materials procurement and General factory support) are as follows (check answer for image example)
Step 2: Reallocating the Costs Assigned to Service Cost Centres to Production Cost Centres
Service departments are also support departments.
These service cost centres render essential services, but they do not deal directly with the products.
Therefore, service centre costs are not allocated to products because products do not pass through these centres.
Nevertheless, the costs of providing support services are part of the total product cost and therefore should be assigned to products.
To assign cost products traditional costing systems reallocate service cost centres to production centres that actually work on the product.
We must determine the total factory cost of producing each unit – that is, not jus the cost of the labour and materials that are directly used in the production (i.e., the prime cost), but also the indirect production costs of services provided by such departments such as maintenance, stores and canteen.
Step 3: Computing Separate Overhead Rates for Each Production Centre
Cost Centre Overheads/ Cost Centre Direct Labour Hours or Machine Hours
Machine hour rate for the machine production centres:
Machine Centre X=(€ 4 300 000)/(2 000 000 machine hours)=€”2.15 per machine hour “
Machine Centre Y=(€3 800 000)/(1 000 000 machine hours)=€”3.80 per machine hour “
Direct labour hour rate for the assembly centre:
Assembly Department=(€3 600 000)/(2 000 000 direct labour hours) “=” €”1.80 per direct labour hour “
What is Step 4: Assigning Cost Centre Overheads to Products or other Chosen Cost Objects about?
Product A: Low sales volume product with direct costs of €100. It is manufactured in batches of 100 units and each unit requires five hours in machine centre A, ten hours in machine centre B and ten hour in the assembly centre.
Product B: High sales volume product with direct costs of € 200. It is manufactured in batches of 200 units and each unit requires ten hours in machine centre A, twenty hours in machine centre B and twenty hours in the assembly centre.
