Accounting 2 Exam 2

Direct Materials and Direct Labor

What costs can be directly traced to a product?

Manufacturing Overhead

What costs are usually allocated instead of traced?

All indirect manufacturing costs

What is manufacturing overhead?

Estimated Overhead Costs / Estimated Allocation Base

What is the predetermined Overhead Allocation Rate formula?

Allocation Base

The activity used to assign overhead (DLHs, machine hours, purchase orders, etc.)

One

Single plant-wide rate uses how many overhead rates?

One for each department

Departmental costing uses how many overhead rates?

Activity-Based Costing

What does ABC stand for?

Activities that cause costs

What does ABC focus on?

cost driver

The factor that causes costs to increase or decrease

• Purchase orders

• Machine hours

• Number of parts

• Direct labor hours

• Number of finished parts

Example of cost drivers:

It allocates overhead based on the activities that actually use resources

Why is ABC more accurate?

Overhead rates

ABC uses multiple what?

1. Identify activities and estimate total costs

2. Identify allocation bases and estimate total activity

3. Compute predetermined overhead rates

4. Allocate indirect costs to products

What are the four steps of ABC?

Estimated Overhead / Estimated Activity

What is the Predetermined Overhead Rate formula?

Predetermined Rate x Actual Activity Used

What is the Allocated Manufacturing Overhead formula?

Target Price

The price customers are willing to pay

Target Cost

Maximum cost allowed while still earning desired profit

Selling Price - Desired Profit

What is the Target Cost Formula?

Manufacturing AND Non-Manufacturing costs

Target cost includes what costs?

1. Determine selling price

2. Subtract desired profit

3. The remaining amount is target cost

What are the three Steps in Target Pricing ?

• DM

• DL

• MOH

Manufacturing (product) costs

selling and administrative expenses

What are period costs

Just-In-Time

Producing goods only when needed

Reduce inventory

What is the goal of Just-In-Time (JIT)

Ordering material in large quantities

Traditional inventory systems focus on what?

Department Estimated OH / Department Estimated Allocation Base

What is the formula for Department Predetermined Rate

Total Product Cost / Number of Units

What is the cost per unit formula?

Total Cost x (1 + Markup %)

ex: 40% markup → Cost x 1.40

What is the Bid Price Formula?

Purchase Orders x Rate per Purchase Order

What is the Purchasing Overhead Formula?

Number of Parts x Rate per Part

What is the Assembly Overhead Formula?

Finished Collars x Rate per Collar

What is the Packaging Overhead Formula?

Purchasing + Assembly + Packaging

Total Manufacturing Overhead (ABC)

Total Product Cost / Number of Collars

What is the cost per collar formula

One plant-wide overhead rate

Traditional costing usually uses what?

Multiple activity rates

ABC usually uses what?

Direct Costs

Can be traced directly to products

Indirect Costs

Must be allocated