test three for cost accounting

the essence of cost accounting is to

determine the cost of manufacturing a product or providing a service

traditional costing accumulated cost as follows

1. identify actual direct materials

2. identify actual direct labor

3. apply overheard to production using a volume based driver (direct labor hours, machine hours, direct labor cost) using either an overall plantwide rate or utilizing departmental rates

activity based costing (ABC) accumulated cost as follows

1. identify actual direct materials

2. identify actual direct labor

3. apply overhead to production using the various activities required for production to take place

for each activity, an overhead rate is calculated based on the

estimated overhead divided by the activity

the activities that may be included are

direct labor hours, machine hours, or direct labor costs

similarities between traditional costing and ABC costing

1. both use actual direct materials and actual direct labor; means comparing traditional to ABC focuses only on overhead applied to various products[][][p

2. the amount of actual overhead is the same regardless of the method used to estimate overhead applied to various products; the method chosen has nothing to do with the amount of actual overhead

3. both rely on calculating overhead rates for various cost drivers

ABC is sometimes called

modern cost accounting

differences between traditional costing and ABC costing

traditional costing may have only one or two overhead rates where ABC may have dozens (we limit to 5 in this course)

definition of activity

an action taken by man or machine to accomplish a task

examples of activity

welding in the production of aluminum fishing boats, also preparing the welder’s check after labor

managers may decide to drop a product if the costs have BLANK more than the revenue and margins have BLANK to unacceptable levels

risen; dropped

estimating overhead costs for individual products plays an extremely important part in the decision to keep or drop a product because

inaccurate estimates often lead to poor decisions

definition of death spiral

increase price to cover costs but seller fewer products because of the higher prices; the decline leads to higher reported costs

the death spiral is a process that continues until

the company is out of business due to lack of sales

a death spiral may occur in a firm with increasing demand if

capacity is added to meet demand and added costs are too great to cover added pricing

a death spiral may lead to companies building new plants to

meet increased demand only to see the plant go idle because of a reduction in demand

definition of two stage allocation

this process takes direct costs directly to the cost object and allocates manufacturing overhead first to various cost pools and then second to the cost object

the two stage allocation process allows for the use of

multiple cost drivers to allocate from the overhead costs pools

the two stage allocation process allows the cost accountant to

take into account the complexity and perhaps special handling for diverse products

definition of product diversity

the difference that exists among the products being manufactured

BLANK costing is better able to capture the diversity that exists in the manufacturing process

activity based

definition of plantwide allocation method

where the company uses one and only one overhead rate to allocate all overhead costs

plantwide allocation method is often called the

single-stage allocation approach

the cost driver for plant wide rates is going to be

direct labor hours, machine hours, or direct labor costs, or units

definition of departmental overhead methods

where the company uses one overhead rate for each department

in departmental overhead methods, each department has

its own cost pool and own overhead rate

the department will use BLANK when calculating the departmental overhead rate whereas, a labor-intensive department will use BLANK

machine hours; direct labor hours

in departmental overhead methods, the cost driver is a

volume driver

definition of activity dictionary

a detailed listing of activities needed to accomplish the task at hand

the best cost driver is one closely related to

the cost being allocated

selection of cost driver is based on three criteria:

1. choose a driver that causes the cost

2. choose a driver in relation to benefits received

3. choose a driver that appears to be reasonable and fair

formula for calculating the rate

estimated cost / activity base

definition of cost hierarchies

different levels of classifying costs going from micro levels to macro levels of activities

definition of volume-related

think one unit of product

definition of batch-related

think one batch of a product (maybe 1000 units)

definition of product-related

think one product in a multi-product company

definition of facility-related

think of all the units and all the products for the entire company

two ways to calculate the cost for one unit

1.