CHAPTER 8

Variable Factory Overhead

These are the factory overhead costs that vary in indirect proportion to the level of production within the relevant range

Variable Cost per Unit

remains constant as production either increases or decreases

Fixed Factor Overhead

costs that remain constant within the relevant range regardless of the varying levels of production.

Fixed Cost per unit

varies inversely with the production that is, the greater the number of units produced, the lower the cost per unit.

Mixed Factory Overhead

These costs are neither fixed nor wholly variable in nature but have characteristics of both.

Budgets

are management’s operating plans expressed in quantitative terms, such as units of production and related costs

Producing Departments

are the cost-accumulation centers in which work is performed directly on the goods being produced.

Service Departments

include activities such as maintenance, employee services, etc. which are necessary for for the entire factory (including the producing departments) to remain in operation

Direct Method

This method ignores any service rendered by one service department to another. It allocates each service department’s total cost directly to the producing departments.

Step method

“sequential method of allocation“. This method recognizes services rendered by service departments and is more complicated because it requires a sequence of allocation. (greatest to least)

Algebraic Method

“Reciprocal Method“, This method allocates costs by explicitly including the mutual services rendered among all departments.

Theoretical, maximum, or ideal capacity

a capacity to produce at full speed without interruptions. It gives no allowance for human capacity to achieve the maximum nor due allowance for any circumstances that might result to a stoppage of production within or not within the control of management (highest physical output possible)

Practical Capacity

a capacity of production that provides allowance for circumstances that might result in stoppage of production.

Expected Actual Capacity

A capacity concept based on a short-range outlook, which is feasible only for firms whose products are seasonal or where the market and style changes allow price adjustments according to competitive conditions and customer demands

Normal Capacity

A capacity of production taking into consideration the utilization of the plant facilities to meet commercial demands served over a period long enough to level out the peaks and valleys that come with seasonal and cyclical variations. This capacity is commonly used in the computations of overhead rates.

Non-controlling account system

An account for each kind of overhead expense according to their nature is opened in the ledger, and charges to such an account are made upon incurrence of the expense.

Control account system

Overhead incurred is recharged, and a subsidiary ledger is maintained to show in detail the nature and account of the expense.

Spending Variance

variance due to expense factors

Idle Capacity Variance

variance due to difference in volume and activity factors

Cost of Goods Sold

If the amount of the OH variance is immaterial or established to be result of inefficiency, it is closed to this account.

Unit Level Activities

These are performed each time a unit is produced. Costs of these activities vary with the number of units produced,

Batch-level activities

are performed each time a batch of units is produced. The costs of these activities vary according to number of batches but remain fixed for all units in the batch.

Product Level Activities

Are those performed as needed to support the production of each different type of product.

Facility Level Activities

Those which sustain a facility’s general manufacturing process.

Cost Drivers

Are the links between cost, activity, and product. They are not needed for direct costs because these can be traced immediately to a product.

Cost function

is used to translate the pool of costs and a cost driver date into a rate per cost driver unit or a percentage of other cost amounts just like the plant wide or departmentalized factory overhead.

Activity based costing

aka transaction costing, Overhead costs that are caused by activities are traced to individual product units on the basis of frequency of consumption of overhead resources by each product. A simple concept which can provide accurate information about a particular product’s consumption of overhead resources.

Volume Based Production

the more units estimated to be produced, the larger the denominator in the equation used to determine the overhead rate, thus, the smaller the overhead application rate.

User’s fee

refers to the process of charging for services consumed by users of the service.