ManagingCostsI_Student10_6slides - What costs are assigned...

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1 Lecture 3: Managing Costs I: A Closer Look at Overhead Costs Learning Objectives Explain the nature of overhead costs & other indirect costs Describe the general principles for allocating indirect costs Allocate overhead costs to products using differen LO1 LO2 2 Allocate overhead costs to products using different overhead rates (ABC next week) Explain relevant issues in estimating overhead rates Discuss the general principles and reasons for allocating indirect costs to responsibility centres Allocate support department costs to production departments LO3 LO4 LO5 LO6 Lecture Outline 1. Overhead cost overview. 2. Overhead allocation methods: Plantwide method 3 Department method 3. Issues in estimating OH rates 4. Allocating support department costs: Direct method Reciprocal method Step-down method What costs are assigned to products? Recall Week 2 Lecture: costs assigned to cost objects are: Direct costs 4 All direct materials and direct labour cost that can be easily traced to products. Indirect costs/ Overhead costs Cannot be easily traced to products. OH costs are allocated to cost objects eg products Question: How are overhead costs allocated ? What is this thing called Overhead Cost? What are overhead costs? Depends on your cost object Overhead costs for product costing are costs that: (i) cannot be easily traced to the individual products (ii) b t d t i di id l d t b t LO1 6 (ii) can be traced to individual product but: (a) it is not economically feasible to do so; or (b) it is more appropriate to treat this cost as a cost of all output Manufacturing vs. non-manufacturing Responsibility costing - indirect costs of responsibility areas
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2 Allocating indirect costs: Some general principles Cost assignment: Tracing Allocation LO2 7 Using cost pools A cost pool is a collection of costs that are to be allocated to cost objects Have a common allocation base Simplifies the process Rent Machine dep Repair & Maintenance Machine hours Utilities insurance Sq metres Product Allocating indirect costs: some general principles Determining cost allocation bases Some factor or variable that allows us to allocate costs in a cost pool to cost objects Ideally should be a cost driver 9 A cost driver is an activity or factor that causes costs to be incurred Ideally cost should increase or decrease in direct proportion to the allocation base (or cost driver) How do we determine this? Recall Week 2 lecture Allocating OH costs to products Why is it important to allocate OH costs to products? Financial reporting Reliable estimate of product costs for management LO3 10 decisions Three possible cost allocation approaches Plantwide rate Departmental rate Activity-based costing (To be discussed next week) Where are we now?
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This note was uploaded on 09/14/2011 for the course ACCT 1001 taught by Professor John during the Spring '11 term at Renmin University of China.

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ManagingCostsI_Student10_6slides - What costs are assigned...

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