D.3. Overhead and Cost Allocation Flashcards

Question

How is variable overhead applied to production calculated?

Answer 1

Multiply the actual number of units produced by the application rate per unit produced. The application rate per unit produced is the number of hours of the allocation base allowed per unit produced multiplied by the application rate per unit of the allocation base. **OR** Multiply the number of machine hours allowed for the actual number of units produced by the application rate per unit of the allocation base.

Answer 2

The predetermined standard application rate for fixed overhead should be decreased to prevent over-application of overhead to production.

Answer 3

* Supervisory and other indirect salaries and wages * Depreciation on production facilities * Indirect materials used * Indirect facility costs such as utilities

Answer 4

Fixed overhead is applied as though it were a variable cost, leading to larger variances due to differences between actual and planned production volumes.

Answer 5

To accumulate all the actual factory overhead costs incurred during the period for allocation to production at the end of the period.

Answer 6

The amount of overhead applied to units produced during a period is less than the actual incurred amount, and each unit produced receives a lower amount of overhead than it should have.

Answer 7

The amount of overhead applied to units produced during a period is greater than the actual incurred amount, and each unit produced receives a greater amount of overhead than it should have.

Answer 8

1. Ending WIP inventory on the balance sheet 2. Finished goods inventory on the balance sheet 3. As an expense in cost of goods sold on the income statement for units that were sold during the period

Answer 9

A debit balance in the factory OH control account indicates that factory overhead was **under-applied** to production.

Answer 10

A credit balance in the factory OH control account indicates that factory overhead was **over-applied** to production.

Answer 11

Debited to COGS and credited to Factory Overhead Control, increasing COGS and decreasing operating income.

Answer 12

Credited to COGS and debited to Factory Overhead Control, reducing COGS and increasing operating income.

Answer 13

It should be pro-rated among the WIP Inventories, Finished Goods Inventory, and Cost of Goods Sold accounts according to the amount of overhead included in each **that was applied to the current period’s production,** not according to the ending balances in each.

Answer 14

Unallocated fixed overheads due to abnormally low production must be recognized as an expense in the period incurred.

Answer 15

They may partially or fully reverse by year-end, especially if standard overhead application rates are adjusted mid-year.

Answer 16

The traditional method, in which all manufacturing overhead costs are allocated to units produced on the basis of volume, is required for external financial reporting and tax reporting in the U.S. ## Footnote Traditional overhead allocation conforms to generally accepted accounting principles because all product costs and only product costs are included in the cost of inventory.

Answer 17

1. It does not always provide a good picture of product cost. 2. Fixed manufacturing overhead costs are allocated as though they were variable. 3. Overhead may be over- or under-applied. 4. Overhead may be over-allocated to some products and under-allocated to others. 5. When it is used in pricing decisions, under-costed products may be underpriced and over-costed products may be overpriced.

Answer 18

Anything that consumes an activity or activities and for which costs are accumulated and measured. ## Footnote Examples are a product, service, job, market, customer, contract, process, department, division, project, or strategic goal. In ABC, cost objects are the focus of cost accumulation and measurement.

Answer 19

A measure of a resource consumed by an activity that causes costs to be incurred (a **resource consumption** cost driver) **OR** A measure of an activity consumed by a cost object (an **activity consumption** cost driver)

Answer 20

1. The cost of resources is assigned to activities (activity cost pools) using resource consumption cost drivers to identify the activities’ usage or consumption of the resources. 2. Each activity cost pool’s total costs are then assigned to cost objects using activity consumption cost drivers that reflect how many units of the activity each cost object consumed during the period. ## Footnote ABC involves identifying (1) resources and their costs, (2) the consumption of resources by activities, and (3) the consumption of activities by cost objects.

Answer 21

A measure of the amount of a resource consumed by an activity, used for assigning a resource cost to a particular activity cost pool. ## Footnote Examples include the proportion, or percentage, of employees' time spent on an activity or the number of kilowatt-hours of electricity used by machines.

Answer 22

A measure of the amount of an activity performed for and consumed by a cost object, in terms of the frequency and intensity of demands placed on the activity by the cost object. It is used to assign costs in activity cost pools to cost objects. ## Footnote Examples include number of purchase orders, number of receiving reports, and number of setups.

Answer 23

* **Different costs allocated**: non-manufacturing costs as well as manufacturing costs may be allocated to products under ABC, and some costs that would be manufacturing overhead costs in a traditional costing system may not be included in manufacturing overhead costs allocated to products under ABC. * **Manufacturing overhead allocations based on different things**: traditional costing systems allocate manufacturing overhead costs according to general usage of resources, whereas with ABC, the overhead cost allocations are based on activities performed and their costs. * **Costs attached to low-volume products**: the use of activity-based costing can result in greater per-unit costs for products produced in low volume relative to other products than would be the case under traditional costing.

Answer 24

It occurs when a cost is allocated to a product other than the product that incurred it, leading to one product bearing costs that should be borne by another. ## Footnote ABC reduces the likelihood of cross-subsidization by performing more accurate cost allocations.

Answer 25

1. Identification of resource costs and activities. 2. Assignment of resource costs to activities using resource consumption cost drivers. 3. Assignment of activity costs to cost objects using activity consumption cost drivers. ## Footnote Setting up an ABC system is more complex and more costly than setting up a traditional system, but ABC provides more accurate cost information.

Answer 26

Activities that consume resources and incur costs for each **unit** of product manufactured or service provided. ## Footnote An example of a unit-level activity is inspecting each unit.

Answer 27

Activities that consume resources and incur costs for each **batch or group of units** of products or services. ## Footnote Examples include machine setups, placing purchase orders, and batch inspection.

Answer 28

Activities performed to support the production of a **specific product** or provision of a **specific service**. ## Footnote Examples include product design and engineering changes to modify products.

Answer 29

Activities that support operations in general and cannot be traced to individual units, batches, products, or services because they are not caused by the manufacture of products or provision of services. ## Footnote Examples include plant management and providing security for facilities.

Answer 30

* Product design * Engineering changes to modify products * Maintaining product specifications * Developing a special testing routine for a particular product

Answer 31

* Plant management * Providing security for the facilities * Incurring property taxes and insurance on the facilities

Answer 32

False ## Footnote Facility-level activity costs are part of product costs.

Answer 33

Identification of non-value-adding activities can enable the company to try to reduce or eliminate them and their costs. As a result the company may be able to either reduce its selling prices or recognize more gross profit from the sale of each unit or provision of each service.

Answer 34

They are activities that add something to the product or service that customers are willing to pay for. Examples are: * Product design to improve usability * Assembling raw materials into finished products * Testing for defects * Packaging to protect the product and shipping to the customer

Answer 35

* **ABC** involves the use of many cost pools, each with its own activity consumption cost driver/allocation base and allocation rate. * **Traditional** overhead allocation uses a single cost pool with one cost allocation base, usually direct labor hours or machine hours, and one cost allocation rate per unit of the allocation base. Separate cost pools may be used for variable and fixed overhead costs if they utilize different allocation bases.

Answer 36

1. Not all costs have appropriate resource consumption cost drivers or activity consumption cost drivers. 2. Product and service costs identified for an ABC system will probably not include every cost associated with the product or service. 3. ABC is expensive and time consuming to develop, implement, and maintain. 4. ABC allocates fixed manufacturing costs as if they were variable costs (as does traditional costing). 5. Activity-based costing systems cannot take the place of traditional costing systems for external financial and tax reporting.

Answer 37

They are treated as product costs and allocated to the units produced during the period according to a predetermined rate. They are inventoried and expensed as COGS when the units they are attached to are sold.

Answer 38

Budgeted Monetary Amount of Fixed Manufacturing Overhead / Budgeted Activity Level of Allocation Base

Answer 39

Absorption costing is required for external financial reporting under U.S. GAAP and for tax reporting by U.S. taxing authorities. ## Footnote Absorption costing includes fixed manufacturing overhead in product costs, affecting operating income based on production and sales levels.

Answer 40

Under variable costing, fixed factory overheads are reported as period costs and expensed in the period incurred. ## Footnote Variable costing does not conform to GAAP and is used internally for decision-making only, as it excludes fixed factory overheads from product costs.

Answer 41

The treatment of fixed factory overheads. ## Footnote Under absorption costing, fixed factory overheads are included in product costs and expensed as cost of goods sold only when the units it is attached to are sold. Under variable costing, fixed factory overheads are treated as period costs and expensed as incurred.

Answer 42

False ## Footnote Variable costing is not acceptable for external financial reporting under GAAP because it does not account for fixed manufacturing overhead as a product cost.

Answer 43

Operating income is greater under absorption costing than under variable costing because some fixed factory overheads incurred during the period are capitalized in inventory under absorption costing but are expensed under variable costing. ## Footnote This occurs because fixed factory overheads are allocated to unsold inventory, deferring their expense to future periods.

Answer 44

Operating income is greater under variable costing than under absorption costing because only the current period fixed factory overheads are expensed, whereas under absorption costing, some fixed factory overheads incurred in previous periods will be expensed as COGS.

Answer 45

1. It provides matching of costs and benefits and is consistent with GAAP and IRS requirements. 2. It aligns with external reporting standards, ensuring compliance with financial as well as tax regulations.

Answer 46

1. Managers can manipulate reported operating income by producing more than can be sold to defer fixed costs to inventory, distorting operating income and creating an undesirable buildup of inventories. 2. When the number of units sold is greater than the number produced, operating income under absorption costing will be lower than it would be under variable costing.

Answer 47

Variable costing ## Footnote Variable costing is more consistent with economic reality because in the short run, fixed costs do not vary with production.

Answer 48

1. Variable costing does not provide proper matching of costs and benefits and is not acceptable for external reporting or tax reporting. 2. Variable costing requires separating all manufacturing overhead costs into their fixed and variable components, and the distinction may be arbitrary. 3. For preparation of a variable income statement, separation of selling and administrative costs between fixed and variable is needed, and that may be arbitrary as well. 4. Fixed costs may be overlooked in decision making.

Answer 49

1. Production and sales are equal during the period, and 2. Beginning inventories for the period were zero (thus no sales could have been made from inventory produced during a prior period at a different cost) ## Footnote In this scenario, all fixed factory overheads are expensed in the period incurred under both methods.

Answer 50

higher ## Footnote This is because absorption costing includes fixed costs in inventory valuation, unlike variable costing.

Answer 51

Administrative services provided by a central department to the company’s operating units and, if applicable, to other service departments. ## Footnote Examples of shared services include human resources, information technology, maintenance, legal, and accounting services such as payroll processing, invoicing, and accounts payable.

Answer 52

1. Provides accurate departmental and product costs for decision-making. 2. Motivates managers to achieve strategic objectives. 3. Provides incentive for managers to make decisions consistent with top management's goals. 4. Fixes accountability and evaluates performance. 5. Can be used to create competition among segments of the organization. 6. Justifies costs and computes reimbursement when a contract provides for cost reimbursement. ## Footnote Allocating these costs recognizes that even though service departments do not directly add value, they provide the services that enable the operating departments to do so. Their costs need to be recognized in pricing and other decisions.

Answer 53

Fixed and variable administrative costs of service departments are allocated together using one cost pool and one allocation base.

Answer 54

Fixed and variable administrative costs of service departments are put into separate-cost pools and allocated separately using different allocation bases.

Answer 55

Low implementation cost due to avoiding the need to classify costs into fixed and variable. ## Footnote However, the single-rate method makes fixed costs of the service departments appear to be variable costs to the user departments, which may lead to outsourcing that hurts the organization as a whole.

Answer 56

* Helps user department managers understand cost behavior. * Encourages user department managers to make decisions beneficial to both the organization and individual departments. ## Footnote The dual-rate method requires more effort to classify costs but provides clearer insights into cost behavior.

Answer 57

Service department administrative costs are allocated sequentially, recognizing some services provided to other service departments. Once a shared service department’s costs have been allocated to other shared service departments and operating departments, no costs will be allocated to it from other shared service departments. ## Footnote The order of allocation is determined by management, often based on the percentage of each shared service department's services provided to other shared service departments.

Answer 58

The reciprocal method recognizes all services provided to other shared service departments and uses simultaneous equations to allocate costs, making it the most theoretically correct method. ## Footnote This method is complex and involves allocating each department's own costs plus some of the other departments' costs that have been allocated to it to other service departments and operating departments.

Answer 59

Under the direct method of allocating shared services costs, only the **operating** departments receive allocations from shared services departments. ## Footnote The services provided by each service department to the other service departments are ignored in the direct method.

Answer 60

False ## Footnote Once a shared services department's costs have been allocated, no further costs will be allocated to it from other shared services departments.

Answer 61

It is the most theoretically correct method as it recognizes all services provided between shared service departments. ## Footnote Despite its complexity, the reciprocal method provides the most accurate allocation of costs.

Answer 62

first ## Footnote The allocation order is whatever management decides to use. A popular method is based on the percentage of services provided by each shared service department to other shared service departments.

Answer 63

Simultaneous equations ## Footnote These equations express how much each shared service department needs to allocate to all the other departments, including costs allocated to them from the other shared service departments.

Answer 64

Direct method ## Footnote In the direct method, only the operating departments receive allocations, and inter-departmental services are ignored.

D.3. Overhead and Cost Allocation Flashcards

Understand allocation of overhead using traditional and activity-based costing, including cost allocation across departments. (89 cards)