PART-3-JOB-ORDER-COSTING.pdf - 190 Part 2 Fundamental...

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identify those factors that ca u se the cons um ption of overhead. Once identified, these ca u sal factors, or ac t ivi t y drivers , sho u ld be u sed to assi g n overhead to prod u cts. It see m s reasonable to ar gu e that for prod u cts u sin g the lathe, m achine ho u rs reflect dif- ferential m achine ti m e and conseq u ently the cons um ption of m achine cost. Units pro- d u ced does not necessarily reflect m achine ti m e or cons um ption of the m achine cost; therefore, it can be ar gu ed that m achine ho u rs is a better activity driver and sho u ld be u sed to assi g n this overhead cost. As this exa m ple ill u strates, activity m eas u res other than u nits of prod u ct are needed when a fir m has mu ltiple prod u cts. The last fo u r m eas u res listed earlier (direct labor ho u rs, direct labor dollars, m achine ho u rs, and direct m aterials dollars or cost) are all u sef u l for mu ltiple-prod u ct settin g s. So m e m ay be m ore u sef u l than others, dependin g on how well they correlate with the act u al overhead cons um ption. As we will disc u ss later, it m ay even be appropriate to u se mu ltiple rates. Choosin g th e Activity L e v e l Now that we have deter m ined which m eas u re of activity to u se, we still need to pre- dict the level of activity u sa g e that applies to the co m in g year. Altho ug h any reason- able level of activity co u ld be chosen, the two leadin g candidates are expected act u al activity and nor m al activity. Exp e ct e d activity l e v e l is si m ply the prod u ction level the fir m expects to attain for the co m in g year. Nor m al activity l e v e l is the avera g e activ- ity u sa g e that a fir m experiences in the lon g ter m (nor m al vol um e is co m p u ted over m ore than one year). For exa m ple, ass um e that Pa u los Man u fact u rin g expects to prod u ce 18,000 u nits next year and has b u d g eted overhead for the year at $216,000. Exhibit 5-4 g ives the data on u nits prod u ced by Pa u los Man u fact u rin g for the past fo u r years, as well as the expected prod u ction for next year. If expected act u al capacity is u sed, Pa u los Man u - fact u rin g will apply overhead u sin g a predeter m ined rate of $12 ($216,000/18,000). However, if nor m al capacity is u sed, then the deno m inator of the eq u ation for prede- ter m ined overhead is the avera g e of the past fo u r years of activity, or 20,000 u nits [(22,000 17,000 21,000 20,000)/4]. Then the predeter m ined overhead rate to be u sed for the co m in g year is $10.80 ($216,000/20,000). P a r t 2 Fundamental Costing and Control 190 P a ulos M a nuf a c t uring D ata EXHIBIT 5-4 Y e ar Units Prod u c e d Year 1 22,000 Year 2 17,000 Year 3 21,000 Year 4 20,000 Expected for next year 18,000 Which choice is better? Of the two, nor m al activity has the advanta g e of u sin g mu ch the sa m e activity level year after year. As a res u lt, it prod u ces less fl u ct u ation fro m year to year in the assi g n m ent of per- u nit overhead cost. Of co u rse, if activity stays fairly stable, then the nor m al capacity level is ro ug hly eq u al to the expected ac- t u

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