1. Functional-based and activity-based costing assigns costs to cost objects such as products and customers. Once costs are assigned to the cost object, the unit cost is calculated by dividing the total cost assigned to the units produced by the number of units produced.
2. Unit cost information is used to:
■ value inventory
■ determine cost of goods sold, which affects income
■ determine bids to give to potential customers
■ decide whether to make or buy a product
■ decide whether to accept or reject a special order
■ decide whether to keep or drop a product line
■ decide whether to ...view middle of the document...
WHEN FUNCTIONAL-BASED COSTING IS USED, DIRECT MATERIALS AND DIRECT LABOR ARE ASSIGNED TO PRODUCTS USING DIRECT TRACING.
16. Overhead costs are assigned using driver tracing and allocations with unit-level activity drivers.
17. Unit-level activity drivers are factors that cause changes in cost as the units produced change.
18. Examples of unit-level drivers include:
■ units produced
■ direct labor hours
■ direct labor dollars
■ machine hours
■ direct material dollars
19. An estimate for activity level can be based on:
■ expected activity capacity, the expected production level of activity for the next year.
■ normal activity capacity, the average activity that the firm expects in the long term (for example, average activity for the next three to five years).
■ theoretical activity capacity, the maximum output possible under perfect operating conditions.
■ practical activity capacity, the output a firm can achieve if it operates efficiently. Efficient operations allow for equipment breakdowns, material shortages, etc.
20. Using practical or theoretical capacity avoids assigning unused capacity costs to products.
21. Unit-level activity drivers assign overhead using either:
■ plantwide rates, or
■ departmental rates.
22. A plantwide overhead rate is calculated as:
23. Overhead cost assigned to product is calculated as:
Applied overhead = Plantwide rate × Actual activity used on product
24. The overhead variance is the difference between actual overhead and applied overhead.
25. Underapplied overhead occurs when applied overhead is less than actual overhead for the period.
26. Overapplied overhead occurs when applied overhead exceeds actual overhead for the period.
27. The following T account for overhead illustrates the relationships:
|Actual overhead costs |Applied overhead |
| |(Plantwide rate × Actual activity) |
|Underapplied overhead |Overapplied overhead |
28. If the overhead variance is relatively small, underapplied or overapplied overhead may be treated as an adjustment to cost of goods sold. Underapplied overhead is added to cost of goods sold, and overapplied overhead is subtracted from cost of goods sold.
29. Departmental rates are calculated as:
30. Overhead cost assigned to product is calculated as:
Applied overhead = Departmental rate × Actual departmental activity used on product
31. See the summary below:
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