Unit 2 Flashcards
Underapplied or overapplied overhead
The difference between the overhead cost applied to Work in Progress and the actual overhead costs of a period
At the beginning of the period
Predetermined Overhead rate = ESTIMATED Total Manufacturing Overhead ÷ ESTIMATED Total units in the allocation base
During the period
Total manufacturing overhead applied = Predetermined overhead rate + ACTUAL Total units of the allocation base incurred during the year
At the end of the period
Under/overapplied overhead = ACTUAL Total manufacturing overhead cost - Total manufacturing overhead applied
If ACTUAL overhead is greater than APPLIED overhead, then it’s UNDERapplied
If ACTUAL overhead is less than APPLIED overhead, then it’s OVERapplied
Disposition of overhead balances
Cost of goods sold
Allocated between accounts (work-in-progress, finished goods, cost of goods sold)
Closing of cost of goods sold by INCREASING balance
DR Cost of good sold
CR Manufacturing overhead
Closing cost of goods sold by DECREASING the balance
DR Manufacturing overhead
CR Cost of good sold
Underapplied overheads
This makes the balances of work-in-progress, finished goods and cost of goods sold to INCREASE
Overapplied overhead
This makes the balances of work-in-progress, finished goods and cost of goods sold DECREASE
Predetermined overhead rate on estimated capacity
Estimated total manufacturing overhead cost ÷ Estimated total units in the allocation base
Means the unit product costs will fluctuate depending on the budgeted level of activity for the period.
Predetermined overhead rate on activity at capacity
Total manufacturing cost at capacity ÷ Total units in the allocation base at capacity
Remains constant and would not be affected by the level of activity during a period.
Will always result in underapplied overhead
Operating departments
those departments or units where the central purposes of the organization are carried out
Milling, assembly, painting (manufacturing), surgery department (hospitals)
Service department
do not engage directly in operating activities. Rather, they provide services or assistance to the operating departments.
Cafeteria, internal auditing, cost accounting, etc
How service department charges operating department
Identify cost driver (allocation base)
Measure consumption of cost driver
Allocate based on relative amount of cost driver as part of overheads applied
The need for cost allocation
Allocate bases
Interdepartmental services
Allocating costs by behaviour
Allocation pitfalls to avoid
Allocation of actual or budgeted costs
Selecting allocation bases
Many companies use a two-stage costing process. The first stage and mainly the second stage
First Stage Allocations
Service department costs are allocated to operating departments.
Second Stage Allocations
Operating department overhead costs and allocated service department costs are applied to products
Interdepartmental services
Services provided between service departments through 3 methods: step method, direct method, and reciprocal method
Direct method
It ignores the services provided by a service department to other service departments and allocates all costs directly to operating departments.
Step method
provides for allocation of a service department’s costs to other service departments, as well as to operating departments.
Sequential
allocates costs forward
Reciprocal method
gives full recognition to interdepartmental services.
allocates costs both forward and backwards
Allocation pitfalls to avoid
Using sale as an allocation base
Allocating fixed costs using a variable activity allocation base
Using sale as an allocation base
Departments that increase revenues are penalized by receiving more allocated costs
Allocating fixed costs using a variable activity allocation base
Total fixed costs do not change, but departments that increase activities to support increased revenues are penalized by receiving more allocated costs
