ACCT 102 Lecture Notes Chapter 17 SPR 2010

ACCT 102 Lecture Notes Chapter 17 SPR 2010 - ACCT 102 -...

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ACCT 102 - Professor Schmidt Lecture Notes – Chapter 17: ACTIVITY-BASED COSTING AND ANALYSIS ASSIGNING OVERHEAD COSTS Background In Chapter 14, we learned that product costs consist of direct materials, direct labor, and factory overhead. We also understood that direct materials are assigned to product costs via the materials requisition form, and direct labor is allocated to product costs using time tickets. Direct material and direct labor costs are easily traceable to these source documents, so accuracy in assigning these costs is not difficult to achieve. However, factory overhead cannot be allocated to products using source documents. We must use an allocation system to assign overhead costs, such as factory maintenance and factory supervisors’ salaries, to products. As factories become more and more mechanized, factory overhead becomes a larger portion of product costs. As a result, assigning factory overhead to individual products manufactured becomes more important. This chapter introduces three methods of allocating overhead: 1. The single plantwide overhead rate method 2. The departmental overhead rate method 3. The activity-based costing (“ABC”) method. Why is this important? Most companies produce more than one product. An important managerial accounting function is to accurately allocate direct materials, direct labor, and factory overhead costs to each product so that the cost of each product is available. Management can then determine the gross profit per product, and use this cost data to set appropriate selling prices for each product. If the product costs are not allocated accurately, the gross profit for each product will be incorrect, and management may set inappropriate selling prices. Plantwide Overhead Rate Method The plantwide overhead rate method is practical when (1) overhead costs are closely related to production volume, or (2) a company produces only one product. The plantwide method is applied as follows: 1. Total budgeted overhead costs are combined into one overhead cost pool. 2.
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ACCT 102 Lecture Notes Chapter 17 SPR 2010 - ACCT 102 -...

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