Chapter4Student2017.docx - Chapter 4 Activity-Based Costing(through page 196 only Traditional Plantwide Overhead Rate In Chapter 3 we learned how to use

Chapter4Student2017.docx - Chapter 4 Activity-Based...

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Chapter 4 - Activity-Based Costing (through page 196 only) Traditional Plantwide Overhead Rate In Chapter 3 we learned how to use a Predetermined Overhead Rate (POHR) o Based on estimates made at the beginning of the year POHR = Total Estimated Overhead Total Estimated Allocation Base o One rate used to allocate manufacturing overhead to jobs and products produced during the year o Use of POHR developed in early 1900’s manufacturing was labor intensive Refining Cost Systems As companies diversify their product lines and manufacturing processes, a single plantwide overhead rate may not be useful Cost Distortion results when some products are overcosted and some are undercosted by the cost allocation system DEPARTMENTAL OVERHEAD RATES Separate predetermined manufacturing overhead rates for each department Useful when o Departments incur different amounts and types of MOH o Different jobs or products use the department resources to a different extent Each department has a separate overhead pool and may have a different allocation base Brewing Bottling Packaging 4 Steps are similar to the steps used in Chapter 3, but are done for each department 1) Estimate total overhead 2) Estimate total allocation base 3) Calculate POHR 4) Allocate overhead costs to cost object : POHR x ACTUAL amount of allocation base
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Donovan’s Fine Furnishings manufactures upscale custom furniture and currently uses a plantwide overhead rate based on direct labor hours. Plantwide Information: Total Estimated Overhead $1,150,000 Total Estimated Direct Labor Hours 25,000 DLH The owner and CEO is considering refining the company’s costing system by using departmental overhead rates and has determined the following: Departmental Information: Department Estimated Overhead Estimate Allocation Base Machining $825,000 13,750 machine hours Finishing $325,000 13,000 direct labor hours Information pertaining to two jobs completed on May 15 follows: Machining Dept. Finishing Dept.
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