Module3 - Part 1 FOH and ABC.docx

Factory Overhead

Indirect materials, indirect labor, and all other factory costs that cannot be conveniently identified with or charged directly to specific jobs, products, or final cost objectives.

Fixed Overhead

Costs that remain relatively constant regardless of changes in the level of output within the relevant range.

Variable Overhead

Costs that change proportionately with production volume within the relevant range.

Semi-variable Overhead

Costs that are neither fixed nor variable; their amount changes, but not in proportion to production volume.

Step-variable Overhead

Costs that increase in few small steps instead of continuously in response to changes in production volume.

Predetermined Overhead Rate

A rate that allows for a consistent and logical allocation of overhead costs to each unit of output.

Activity-Based Costing (ABC)

A costing method that uses several activity rates to allocate overhead costs based on different activities.

Absorption Costing

A costing method that includes fixed overhead in the cost of a product.

Direct Costing

A costing method that only includes variable costs in the cost of a product.

Plantwide Rate

A single predetermined overhead rate for an entire factory used to allocate overhead costs to products for all departments.

Overhead Rate Base

The factor measured in the denominator of an overhead rate, crucial for providing meaningful cost data in a cost system.

Correlation Analysis

A method discussed in Chapter 3 used to select the base for applying overhead, ensuring a reasonable proportion to indirect factory resources.

Direct Labor Cost Base

A method of applying factory overhead where estimated overhead is divided by estimated direct labor cost to compute a percentage.

Direct Labor Hour Base

A method of applying factory overhead based on direct labor hours, computed by dividing estimated overhead by estimated direct labor hours to determine a percentage.

Machine Hour Base

A method of applying factory overhead based on machine hours, calculated by dividing estimated overhead by estimated machine hours to determine a percentage.

Departmental Predetermined Overhead Rates

A system where each department has its own predetermined overhead rate, reflecting differences in how overhead costs are incurred across departments.

Plantwide Allocation Method

A method where the entire plant is considered one cost pool for allocating overhead costs, contrasting with the department allocation method.

Illustrative Example 4-1

A scenario demonstrating the application of plantwide and departmental overhead rates in a company producing two products through different departments.

Plantwide – Factory Overhead Rate

A single predetermined overhead rate used to allocate overhead costs to products based on a single allocation base for the entire factory.

Departmental Overhead Rates

Predetermined overhead rates used to assign overhead costs to products based on different allocation bases for each department within a factory.

Non-Unit-Based Drivers

Factors other than the number of units produced that measure the demands that cost objects place on activities, such as setup costs or product engineering costs.

Product Diversity

Differences in how products consume overhead activities in terms of size, complexity, setup time, and batch size, leading to variations in the consumption ratio of activities.

Capacity-Level

The level of activity selected when calculating a predetermined overhead rate, affecting the fixed and variable portions of the factory overhead rate.

Absorption Costing

A costing method that includes both fixed and variable costs in factory overhead rates, treating fixed costs as product costs and including them in inventories.

Direct Costing

A costing method that only includes variable factory overhead in overhead rates, treating fixed costs as period costs and not including them in inventories.

Factory Overhead Variances

Differences between actual factory overhead costs and applied factory overhead costs, which do not arise under direct costing due to idle capacity.

Factory Overhead

Indirect costs incurred in the manufacturing process that are not directly attributable to specific units of production.

Control

Involves reporting costs to department heads and comparing them with budgeted amounts for the achieved level of activity to ensure efficiency.

Chart of Accounts

A list of accounts used by a company to classify financial transactions and organize financial statements.

Applied Factory Overhead

The amount of factory overhead allocated to production output based on a predetermined rate.

Actual Factory Overhead

The total indirect costs incurred during a specific period in the manufacturing process.

Predetermined Factory Overhead Rate

A rate used to allocate factory overhead costs based on estimated activity levels.

Underapplied Factory Overhead

When the actual factory overhead costs exceed the applied factory overhead costs.

Overapplied Factory Overhead

When the applied factory overhead costs exceed the actual factory overhead costs.

Backflush Costing

A method where factory overhead costs are directly charged to Cost of Goods Sold in a just-in-time manufacturing environment.

Debit Balance

Indicates underapplied factory overhead, meaning actual costs exceed applied costs.

Credit Balance

Indicates overapplied factory overhead, meaning applied costs exceed actual costs.

Income Summary

An account used to summarize the company's revenues and expenses for a specific period before closing to the retained earnings.

Cost of Goods Sold

The direct costs attributable to the production of goods sold by a company.

Immaterality

Refers to an amount so small that its impact on financial statements is insignificant and does not affect decision-making.

Adjustment

Changes made to financial statements to account for discrepancies such as over- or underapplied factory overhead.

Cost of goods manufactured

The total cost incurred to produce goods that are available for sale during a specific time period.

Underapplied factory overhead

The situation where the actual factory overhead costs exceed the amount applied to production.

Actual costing

A costing method that assigns actual costs to products, including actual direct materials, actual direct labor, and actual factory overhead.

Gross profit

The difference between sales revenue and the cost of goods sold.

Overapplied factory overhead

The situation where the amount of factory overhead applied to production exceeds the actual factory overhead costs.

Activity-Based Costing

A cost management system that assigns costs based on the activities that drive costs in the production of goods or services.

Unit-Based Product Costing

A traditional product costing system that assigns overhead costs to products using unit-based activity drivers.

Direct tracing

The process of directly assigning costs, such as direct materials and direct labor, to specific products.

Unit-Based Product-Costing

A method of assigning overhead costs to products by creating cost pools and using predetermined overhead rates based on unit-level drivers.

Driver Tracing

The process of assigning overhead costs to products based on specific cost drivers.

Predetermined Overhead Rates

Rates used to assign overhead costs to products throughout the year based on estimates, as waiting until the end of the year is not feasible.

Normal Cost System

A cost system that uses predetermined overhead rates and actual costs for direct materials and direct labor.

Budgeted Overhead

An estimate of the amount of overhead costs to be incurred in the upcoming year, often based on the previous year's figures adjusted for anticipated changes.

Transaction Base

A method of associating costs with specific activities, such as assigning setup costs based on the number of setups.

Activity-Based Costing (ABC)

A cost accounting system that focuses on activities performed in an organization to assign costs based on the nature and extent of those activities.

Cost Pools

Related groups of costs accumulated for allocation to products or services.

Cost Drivers

Factors used to assign costs to products or services based on the activities performed.

Activity Identification

The process of identifying actions or work performed by equipment or people for other people in designing an activity-based costing system.

Activity Attributes

Characteristics of activities with a product costing objective, including descriptions of the activity, types of resources used, time spent by workers, cost objects consuming the activity, and activity consumption measures.

Activity Dictionary

A document that names activities, describes tasks, classifies activities as primary or secondary, lists users (cost objects), and identifies activity output measures.

Activity Classification

Categorizing activities based on attributes to achieve managerial objectives like product or customer costing, continuous improvement, total quality management, and environmental cost management.

Primary Activity

An activity consumed by a final cost object like a product or customer.

Secondary Activity

An activity consumed by intermediate cost objects such as primary activities, materials, or other secondary activities.

Resource Driver

Base used to allocate the cost of a resource to different activities using that resource.

Activity Driver

Base used to allocate the cost of an activity to products, customers, or other final cost objects.

Unit Level

Level of data aggregation in activity-based costing, focusing on individual units.

Batch Level

Level of data aggregation in activity-based costing, focusing on batches of identical units.

Product Level

Level of data aggregation in activity-based costing, focusing on products.

Organization/Factory/Plant Level

Level of data aggregation in activity-based costing, focusing on the entire organization, factory, or plant.

Activity-Based Costing (ABC)

A costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.

Unit-Level Activities

Activities that are performed each time and vary with the number of units produced and sold, such as grinding, polishing, and assembly.

Batch-Level Activities

Activities that are performed each time and vary with the number of batches produced and sold, such as setups, receiving and inspection, and production or work orders.

Product-Level Activities

Activities performed to support the production of different products, such as product design, engineering changes, and developing product-testing procedures.

Organizational or Facility or Plant-Level Activities

Activities that sustain a factory's general manufacturing processes, such as floor space occupied, maintenance, and providing plant security.

Cost Pools

Categories of costs, such as unit-level, batch-level, and product-level costs, used in activity-based costing to accumulate costs before assigning them to cost objects.

Cost Drivers

Factors that cause costs to be incurred, such as direct labor hours, machine hours, or number of setups, used to allocate costs from cost pools to cost objects.

Two-Stage Cost Allocation

A method in activity-based costing where costs are first allocated to activity cost pools based on resource drivers and then assigned to products or services using activity drivers.

Cost Objects

Products or services for which costs are accumulated and assigned in activity-based costing, helping to determine the cost of each product accurately.

Accuracy in Cost Assignments

The goal of activity-based costing to assign costs more accurately to products or services, leading to better decision-making and justification for using ABC.

Product Profitability

The measure of how profitable a product is, calculated by subtracting the total product cost from the total product revenue.

Company Profit

The overall profit or loss of a company, calculated by subtracting the total organizational or facility-level costs from the total margin provided by products.

Activity-Based Costing System

A costing method that assigns costs to products based on the activities (cost drivers) performed to produce, distribute, or support those products.

Cost Driver

A factor that causes a particular cost to be incurred, used to allocate costs to cost objects in an activity-based costing system.

Cost Pool

A grouping of costs that are allocated to cost objects based on a common characteristic or activity driver in an activity-based costing system.

Two-Stage Cost Allocation System

A system that first allocates costs to cost centers and then allocates those costs from the cost centers to products, commonly used in activity-based costing.

Homogeneity of Costs

The concept that costs within an activity cost pool in activity-based costing are similar in their logical relationship to the activity driver.

Traditional Costing

A costing system that uses volume-related or unit-level measures as bases for allocating overhead to output, characterized by the use of unit-based systems.

Activity Driver Selection

The process of choosing appropriate activity drivers for each significant, costly activity in an activity-based costing system.

Unit-Based System

A traditional costing system that allocates overhead costs to output based on volume-related measures, such as direct labor hours or machine hours.

Activity-Based Costing (ABC)

A costing method that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each.

Direct (Variable) Costing

A costing method where fixed costs are treated as period costs and are not allocated to products, batches, or units.

Traditional Absorption Costing

A costing method that allocates fixed costs using unit-level allocation bases, potentially distorting product costs.

Total Quality Management (TQM)

An approach that aims to improve quality and performance throughout the organization, with a focus on customer satisfaction.

Attribute-Based Costing (ABC II)

An extension of activity-based costing that focuses on detailed cost-benefit analyses related to customer needs and incremental improvements for product attributes.

Duration-Based Costing (DBC)

A simplification method that eliminates the need for the first stage of activity-based costing and simplifies the second stage, using duration-based drivers for cost allocation.

Cycle Time

The length of time required to produce one unit of a product.

Practical Capacity

The maximum level of activity that can be achieved under normal circumstances.

Total Overhead Cost

The sum of all indirect costs associated with producing a product.