AC 212 Lecture Notes - Lecture 4: Indirect Costs, Cost Driver

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peachjellyfish757

4 Jan 2018

School

Quinnipiac University

Department

Accounting

Course

AC 212

Professor

Katherine Simione

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Document Summary

Activity-based costing, lean operations, and the costs of quality. Lo 1 develop and use departmental overhead rates to allocate indirect costs. Lo 2 develop and use activity-based costing (abc) to allocate indirect costs. Lo 1 develop and use departmental overhead rates to allocate indirect costs: when to use, different jobs or products use the department resources to a different extent. Review: a plant-wide overhead rate means allocating manufacturing overhead costs using one predetermined manufacturing overhead rate for all operations. Step 1) estimate the total manufacturing overhead (moh) costs to be incurred in each department in the coming year (known as departmental overhead cost pools). Step 2) select an allocation base for each department and estimate the total amount that will be used during that year. Step 3) calculate the departmental overhead rates: step 1 divided by step 2= departmental rates: (estimated moh/estimated allocation base) for each department.

Related Questions

Jordan Company currently is using a plant-wide factory overheadrate based on machine hours. The budgeted factory overhead costs is$405,000. Company has two departments, X and Y. Company isconsidering use of departmental overhead rates for the allocationof each departmentsâ overhead costs to jobs. Overhead would beapplied based on direct labor cost in Department X andmachine-hours in Department Y. The following additional informationis available:

BudgetedAmounts DepartmentX Department Y

Direct laborcost $180,000 $165,000

Factoryoverhead $225,000 $180,000

Machine-hours 51,000mh 40,000 mh

Actual data for Job#10 DepartmentX Department Y

Direct materialsrequisitioned $10,000 $16,000

Direct laborcost $11,000 $14,000

Machine-hours 5,000mh 3,000 mh

1. Compute total costof manufacturing Job 10 under current system (using plant-widerate).

2. Compute total costof manufacturing Job 10 using departmental overhead rates.

greycheetah389

Ramsey Company produces speakers (Model A and Model B).Ramseyâs controller, Mr. Jacks, is evaluating the different methodsof allocating manufacturing overhead to the products. Both productspass through two producing departments. Model Aâs production ismuch more labor-intensive than that of Model B. Model B is alsomore popular of the two speakers. The following data have beengathered for the two products.

		Product Data
		Model A	Model B
Units produced & sold per year		20,000	200,000
Sales Revenue		$600,000.00	$6,000,000.00
Prime cost		$100,000.00	$1,000,000.00
Direct Labor Hours		140,000	300,000
Machine hours		20,000	180,000
Set Ups		40	160
Inspection runs		600	1,400
Packing Orders		9,000	81,000
Estimated Manufacturing Overhead:
Machining costs	$160,000.00
Setup costs	$180,000.00
Inspection costs	$140,000.00
Packing costs	$180,000.00
Total Manufacturing Overhead	$660,000.00

Suppose that Ramsey decides to use departmental overhead rates.There are two departments: Department 1 (machine intensive) with anMOH rate of $2.75 per machine hour and Department 2 (laborintensive) with an MOH rate of $1.25 per direct labor hour. Theactual consumption of these two drivers is as follows:

	Department 1	Department 2
	Machine Hours	Direct Labor Hours
Model A	55,000	110,000
Model B	145,000	330,000

Compare the results for the simple cost allocation system(plant-wide), departmental cost allocation and the ABC costallocation systems. Which do you think is more accurate and why? What circumstances would favor Ramseyadopting ABC as their allocation method (provide at least threereasons)?

POCHTAR CORPORATION

The POCHTAR CORPORATION had used a single plant-wide rate to determine its predetermined overhead rate at the beginning of the year, but it has now decided that the most appropriate method is to use two individual department overhead rates, one for the Machining Department and one for the Assembly Department. In computing the predetermined overhead rate(s), whether a single plant wide rate is used or whether two department overhead rates are used, direct labor hours is used as the cost driver for the operating departments.

At the beginning of the year the POCHTAR CORPORATION has prepared individual department overhead budgets, before any allocations, and identified cost drivers for the departments listed below:

DEPARTMENT OVERHEAD BUDGETS

Support Departments:

Building and grounds (cost driver: square feet) $12,000

Personnel (cost driver: employees) 1,200

General plant administration (cost driver: manufacturing hours) 25,000

Operating Departments:

Machining $35,500

Assembly 46,300

BUDGETED AMOUNT OF EACH COST DRIVER

The budgeted amounts for each cost driver per department are given below:

Department Direct labor hrs. Employees Square feet Manuf. hours

Building & Grounds 0 0 0 0

Personnel 0 0 12,000 0

General plant 0 35 8,000 0

Machining 5,000 50 30,000 8,000

Assembly 15,000 100 50,000 17,000

REQUIRED:

What is the predetermined overhead rate using a single plant-wide rate? If necessary, round to the nearest cent.

What are the two predetermined overhead department rates, using the direct method of allocating support costs to the operating departments. ? If necessary, round to the nearest cent.

What are the two predetermined overhead department rates, using the step method of allocating support costs to the operating departments. ? If necessary, round to the nearest cent.

Based on the following information about two jobs, A and B, determine the total overhead costs for each job by using (1) the single plant-wide rate computed in question 1 above and (2) two predetermined overhead rates using the direct method of allocating support costs to the operating departments computed in question 2 above. Very briefly explain which method makes more sense. Please do not simply say that one method is more accurate than the other.

Direct Labor Hours:

Machining Department Assembly Department

Job A 18 2

Job B 3 17

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AC 212 Lecture Notes - Lecture 4: Indirect Costs, Cost Driver

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