ACG2071 Chapter 2 + 7.1 Holly Sudano FSU

Jon-Order Costing

Used for unique or custom-ordered products/services that differ in the amount of DM, DL, and MOH used. Also used for small batches and trades (plumbers, electricians).

Process Costing

Used for a large number of identical units that typically go through a uniform production process. Used for mass manufacturing.

What are the costs of direct materials (DM), direct labor (DL), and manufacturing overhead (MOH) tracked on?

A job cost sheet

How to measure Direct Materials Cost:

- Bill of Materials

- Materials Requisition Form

Bill of Materials

A document that lists the quantity of each type of direct material needed to complete a job.

Materials Requisition Form

A document that specifies the type and quantity of materials to be retrieved from the storeroom and identifies the job that will be charged for the cost of the materials.

How to measure Direct Labor Cost:

- Time Ticket or Labor Time Record

Time Ticket or Labor Time Record

An hour-by-hour summary of the employee's activities throughout the day.

How to measure Manufacturing Overhead Cost:

Step 1: To allocate, companies first calculate an allocation rate referred to as the predetermined overhead rate before the year begins.

Predetermined MOH Rate = (Est. Total MOH Cost)/(Est. Total Amount of Allocation Base)

Step 2: Once the rate is calculated, overhead can then be "applied" or allocated to different jobs as those jobs "use" the allocation base.

MOH applied to a particular job = (Predetermined MOH Rate) x (Amount of Allocation Base used by the job)

Predetermined MOH Rate

Based upon the estimated total MOH costs and the estimated total amount of the allocation base rather than the actual total MOH cost and actual total allocation base.

Plantwide Overhead Rate

A single predetermined overhead rate used by many companies to allocate all manufacturing overhead costs to jobs.

Departmental MOH Rate

(Est. Total Dept. MOH Cost)/(Est. Total Dept. Allocation Base)

Why is the allocation system that uses multiple rates seem more accurate?

It captures:

1. The types of resources used

2. The amount of those resources used

What is "cost distortion"?

This occurs whenever some products/jobs are allocated too much MOH (overcosted) while others are allocated too little MOH (undercosting).

Why does "cost distortion" matter?

Cost data is used for bidding out jobs, pricing decisions, outsourcing decisions, product mix decisions, etc.

Activity-Based Costing (ABC)

Goes a step farther in refining the way we allocate our indirect costs.

ABC's 4 Key Steps

1. Define activities, activity cost pools, and activity measures

2. Assign overhead costs to activity cost pools

3. Calculate activity rates

4. Assign overhead costs to cost objects

Steps 1 and 2:

(Top to Bottom)

- Activity: Any event that causes the consumption of overhead resources.

- Activity Cost Pool: The overhead costs associated with an activity. It represents a "bucket" in which costs are accumulated that relate to a single activity in the ABC system.

- Activity Measure: An allocation base in an activity-based costing system. Also referred to as the cost driver.

Step 3:

- Find the Activity Rate.

Activity Rate = (Est. Total Costs in Pool)/(Est. Total Amount of Allocation Base)

Step 4:

- Allocate the indirect costs for each cost pool to the job.

MOH applied to a particular job = (Activity rate) x (Amount of Allocation base used by the job)

Why do we believe ABC gives a more accurate allocation of MOH than a plantwide rate?

ABC accounts for the TYPES of resources used and the EXTENT to which they are used.

What benefits do companies gain from analyzing activities and cost drivers, even if they do not follow through with using a full-blown ABC costing system to determine job costs?

By analyzing activities and cost drivers, companies are able to think about:

1. What activities are driving their costs?

2. Do these activities add value?

3. Is there a better or more efficient way to perform these activities?