how are overhead costs accounted for and computed using the traditional and ABC
ID: 2538069 • Letter: H
Question
how are overhead costs accounted for and computed using the traditional and ABC method?
what is the difference between a Job Order Costs System used in a manufacturing process versus a company that uses a Job Order Costs System for services?
what are the 3 different types of activity levels? Describe each one. what is the name of the report used to accumulate costs for a Job Order Costs System?
how do you prepare a job order cost report? what is the name of the report used to accumulate costs for a Process Costing System?
how do you prepare a Production Costs Report using the FIFO method? how do you prepare a Production Costs Report using the Weighted Average method?
what is the difference between the FIFO and Weighted Average method? why is unit cost important for manufacturing and nonmanufacturing firms?
how are selling & administrative expenses accounting for?
how is spoilage accounted for using a Job Order versus a Process Costing System?
Explanation / Answer
Solution 1:
Under a traditional volume-based product costing system, Cost of each product is calculated as the sum of actual direct material cost, actual direct-labor cost, and applied manufacturing overhead.
Overhead is applied on the basis of the predetermined rate which is calculated using the direct labor hours.
Predetermined Overhead rate is computed by dividing budgeted manufacturing overhead rate by budgeted amount of cost driver. Cost driver used in traditional volume-based costing system is the direct labor hours.
Activity Based costing system operates following a two-stage procedure to assign overhead costs to products.
In the first stage Overhead Costs is assigned to each activity on the basis of activity cost pool. In the second stage overhead costs from each activity cost pool is allocated to each product in proportion to its consumption of the activity on the basis of Cost Driver selected for that particular cost pool.
All the eight activity cost pools are divided into four broad categories as mentioned below:
Unit Level
For each unit of production, this type of activity is done. Machine-related activity cost pool represents the unit level.
Batch Level
For each batch of products, this type of activity is done. Setup, purchasing, material handling, quality assurance, and packing activity cost pool represents the batch level.
Product-Sustaining level
Activities that are needed to support an entire product line but are not performed every time a new unit or batch of product is produced. Engineering design costs are considered under this category.
Organization-sustaining Level
Activities that are required for the entire production process to occur are classified under this category. Example plant management salaries, depreciation, property taxes.
Eight activity Cost Pool identified under four broad categories of Activity Based Costing is as follows:
Categories
Activity Cost Pool
Cost Driver
Unit Level
Machine Related
Machine Hours
Batch Level
Setup
Production Runs
Purchasing
Purchase Orders
Material handling
Production Runs
Quality Assurance
Inspection Hours
Packing/Shipping
Shipments
Product-Sustaining level
Engineering Design
Engineering Hours
Facility Level
Facility
Machine Hours
Categories
Activity Cost Pool
Cost Driver
Unit Level
Machine Related
Machine Hours
Batch Level
Setup
Production Runs
Purchasing
Purchase Orders
Material handling
Production Runs
Quality Assurance
Inspection Hours
Packing/Shipping
Shipments
Product-Sustaining level
Engineering Design
Engineering Hours
Facility Level
Facility
Machine Hours
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