BEC Chapter 5
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When is Job Order Costing Appropriate to use
When direct cost can be identified with specfic units groups of units, or production. unique productions
Companies that use JOC are Construction, Aircraft, Manufacturing, Printing, Auto Repair, and Professional service.
what is the overhead application rate
a rate predetermined yearly using a based that is common to all units produced such as labor hours, direct labor cost, machine hours.
=estimated Factory overhead/Estimated activity base
WHen is Process Costing appropriate
For enterprises that produce a continuous mass of like unites through a series of productions steps called operations or processes.
- Normal spoilage- Spoilage that is inherent in the manufacturing process and is uncontrollable in the short run.
- Abnormal Spoilage-goes beyond the normal spoilage rate and is a result of inefficiency. A loss for that period.
Methods of allocating Joint Cost
- 1. Relative Market (Sales) Value Method-allocates joint costs to products based on their relative sales value at the split off point.
- 2. Net Realizable Velue Method-if no sales value than allocated based on the basis of each products net realizable value.
- 3. Physical Measure Method- allocation would be based on physical measurement. this method is not sugguested.
Methods of Allocation of cost for a service department
- Direct Method- Allocates the cost directly to the producing department.
- Step Method-cost are allocated to service department and production departments that are most wide used.
- Reciprocal Method-cost are allocated among service departments simultaneously.
the purpose of activity based costing is to assign cost to activities performed in the organization and then assign them to products according to each product's use of the activity. apppropriate of selling, administrative, and general business functions as well as manufacturing and revenue-producting products
Steps to establish an ABC system
- 1. Identify relevant activities
- 2. Organize activites by cost centers
- 3. identify major elements of indirect cost
- 4. identify cost drivers, assign costs to activities, assign activities to products.
- 5. establish a cost-flow
- 6. Establish appropriate cost conversion tools
- 7. Gather data information for the ABC System.
- 8. Establish the cost-flow model to develop costing rates.
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