Question

how are overhead costs accounted for and computed using the traditional and ABC method?

what is the difference between a Job Order Costs System used in a manufacturing process versus a company that uses a Job Order Costs System for services?

what are the 3 different types of activity levels? Describe each one. what is the name of the report used to accumulate costs for a Job Order Costs System?

how do you prepare a job order cost report? what is the name of the report used to accumulate costs for a Process Costing System?

how do you prepare a Production Costs Report using the FIFO method? how do you prepare a Production Costs Report using the Weighted Average method?

what is the difference between the FIFO and Weighted Average method? why is unit cost important for manufacturing and nonmanufacturing firms?

how are selling & administrative expenses accounting for?

how is spoilage accounted for using a Job Order versus a Process Costing System?

Answer 1

Solution 1:

Under a traditional volume-based product costing system, Cost of each product is calculated as the sum of actual direct material cost, actual direct-labor cost, and applied manufacturing overhead.

Overhead is applied on the basis of the predetermined rate which is calculated using the direct labor hours.

Predetermined Overhead rate is computed by dividing budgeted manufacturing overhead rate by budgeted amount of cost driver. Cost driver used in traditional volume-based costing system is the direct labor hours.

Activity Based costing system operates following a two-stage procedure to assign overhead costs to products.

In the first stage Overhead Costs is assigned to each activity on the basis of activity cost pool. In the second stage overhead costs from each activity cost pool is allocated to each product in proportion to its consumption of the activity on the basis of Cost Driver selected for that particular cost pool.

All the eight activity cost pools are divided into four broad categories as mentioned below:

1. Unit Level
2. Batch Level
3. Product-Sustaining level
4. Organization-sustaining Level.

Unit Level

For each unit of production, this type of activity is done. Machine-related activity cost pool represents the unit level.

Batch Level

For each batch of products, this type of activity is done. Setup, purchasing, material handling, quality assurance, and packing activity cost pool represents the batch level.

Product-Sustaining level

Activities that are needed to support an entire product line but are not performed every time a new unit or batch of product is produced. Engineering design costs are considered under this category.

Organization-sustaining Level

Activities that are required for the entire production process to occur are classified under this category. Example plant management salaries, depreciation, property taxes.

Eight activity Cost Pool identified under four broad categories of Activity Based Costing is as follows:

Categories	Activity Cost Pool	Cost Driver
Unit Level	Machine Related	Machine Hours
Batch Level	Setup	Production Runs
	Purchasing	Purchase Orders
	Material handling	Production Runs
	Quality Assurance	Inspection Hours
	Packing/Shipping	Shipments
Product-Sustaining level	Engineering Design	Engineering Hours
Facility Level	Facility	Machine Hours