Class 8

Chapter 4 - What does it cost? How do you divide the cost?

Use of cost drivers to accumulate costs.

Estimated vs. Actual Costs

Managers use estimated costs to make decisions about the future.

Timely

Potential Inaccuracies

Relevant

Identifying Direct and Indirect Costs

Indirect Costs cannot be traced. Harder to identify.

Don't give ppl incentives to cheat. Anything you don't reward, people won't do.

Costs that can be traced to departments in a cost-effective manner care called direct costs.

Costs that cannot be traced to departments in a cost-effective manner care called indirect costs.

Allocate indirect costs to cost objects.

Identify the most appropriate costs driver for each indirect cost. (politics!)

Indirect costs should be allocated to reflect how the departments consume resources.

Two step process:

Allocation rate = total cost / cost driver activity

Allocated cost = allocation rate x weight of the cost driver activity

When you put it together with a statement and present it nicely with good format - you're a managerial accountant!

Using Volume Measures to Allocate Variable Overhead Costs

variable overhead costs are direct costs.

Allocating Fixed Overhead Costs.

Objective:

There are no volume based cost drivers for fixed overhead.

Fixed Cost / N(Volume) = unit fixed cost

When volume goes up, the unit fixed cost goes down. KNOW THIS FOR THE DEPARTMENTAL FINAL!!

Allocating Costs to Solve Timing Problems

Allocating fixed costs can be complicated when the volume of production varies from month to month.

If prices are based on these costs, units produced in Jan will be priced higher than those produced in Feb.

Very IMPORTANT TERMINOLOGY

Predetermined Overhead Rate (POHR) = estimated overhead for the year / estimated allocation base for the year.

Ex: POHR = $36,000 / 18,000 units = $2.00 per unit

$2 allocated to each unit produced for all months during the year.

Benefits and detriments of allocating pooled costs.

Frequently, companies accumulate many individual costs into a single cost pool.

Pooling should be limited to costs with common cost drivers.

Allocating Joint Costs

Only allocate the joint costs, which are indirect. they are from processes with a common input.

Use the most objective, relevant and reasonable data (often sales value) to divide the costs.