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$1215000
Actual manufacturing overhead rate =
27000 direct manufacturing labor hours
DIRECT MATERIALS
Date Materials Quantity Unit Total
Received Requisition No. Part No. Used Cost Costs
Feb. 3, 2006 2006: 198 MB 468-A 8 $ 14 $ 112
Feb. 3, 2006 2006: 199 TB 267-F 12 63 756
Total $4,606
DIRECT MANUFACTURING LABOR
Period Labor-Time Employee Hours Hourly Total
Covered Record No. No. Used Rate Costs
Feb. 3-9, 2006 LT 232 551-87-3076 25 $ 18 $ 450
Feb. 3-9, 2006 LT 247 287-31-4671 5 19 95
Total $1,579
MANUFACTURING OVERHEAD
Cost pool Allocation-Base Allocation- Total
Date Category Allocation-Base Units Used Base Rate Costs
Dec. 31, 2006 Manufacturing Direct Manufacturing 88 hours $ 45 $ 3,960
Labor-Hours
Total $ 3,960
TOTAL MANUFACTURING COST OF JOB $ 10,145
MATERIALS-REQUISITION RECORD
Panel 2
Material
Requisition
Number Description Quantity Rate Amount
47624 Bar steel 720 lbs $11.50 $8,280.00
Stock 3
A35161 Subassemblies 290 units 38.00 $11,020.00
Panel 4
Cost Assignment
Cost
Object
Cost tracing
Direct
costs
Traditional
costing Cost
systems
objects
Indirect Cost allocations
costs
ABC
systems
Traditional Costing Systems
First stage
allocations
Inexpensive to operate
Extensive use of
arbitrary cost allocations
Low levels of accuracy
High cost of errors
Service
dept
S1 S2 S3 S4
Conceptual
view of the
Producing
separate
DM
DL
FO
DM
DL
FO
DM
DL
FO
dept
department
overhead
rates
Common cost are allocated to all the departments. Some cost can be
directly related such as salary of the engineer working in the service
quality department, however other need to be allocated using an
allocation base.
Employee-related expenditure:
works management, works canteen, payroll office Number of employees
Depreciation and insurance of plant and machinery Value of items of plant and
machinery
Stage 2 :Reallocating the cost assigned to service
cost centers to production cost centers.
the next step is to reallocate the costs that have been assigned to service cost
centres to production cost centres. Service departments or support department
are those departments that exist to provide services of various kinds of other
units within the organization. For example, the costs of the cafeteria can be
reallocated to the production cost center by using number of workers in the
factory as the allocation base.
There are three methods in reallocating the cost from service to production
departments.
1.DIRECT METHOD
2.STEP METHOD
3.ALGEBRIC METHOD
Diagram of 3 diff, Service department Producing department
allocation methods
X A
Part 1
Direct method
Y B
X A
Part 2
Step method
Y B
X A
Part 3
Algebraic
method
Y B
Stage 3: Assigning cost center overheads to
products or other chosen cost objects.
In the final step is to allocated the overheads to products passing through the
production centers. Volume base allocation is used to assign the overhead
costs to the products. Example, number of units produced, number of
machine hours used.
The annual costs for the Enterprise Company which has three
production centres (two machine centres and one assembly centre)
and two service centres (materials procurement and general factory
support) are as follows:
() ()
Machine shop: X 8 000 000 10 000 300 1 000 000 2 000 000
Y 5 000 000 5 000 200 1 000 000 1 000 000
Assembly 1 000 000 15 000 300 2 000 000
Stores 500 000 15 000 100
Maintenance 500 000 5 000 100
15 000 000 50 000 1000
4 300 000
Machine centre X = = 2.15 per machine hour
2 000 000 machine hours
3 800 000
Machine centre Y = = 3.80 per machine hour
1 000 000 machine hours
3 600 000
Assembly department = = 1.80 per direct labour hour
2 000 000 direct labour hours
Product A
Direct costs (100 units x 100) 10 000
Overhead allocations
Machine center A (100 units x 5 machine hours x 2.15) 1 075
Machine center B (100 units x 10 machine hours x 3.80) 3 800
Assembly (100 units x 10 direct labour hours x 1.80) 1 800
Total cost 16 675
Cost per unit (16 675/100 units) = 166.75
Product B
Direct costs (200 units x 200) 40 000
Overhead allocations
Machine center A (200 units x 10 machine hours x 2.15) 4 300
Machine center B (200 units x 20 machine hours x 3.80) 15 200
Assembly (200 units x 20 direct labour hours x 1.80) 7 200
Total cost 66 700
Cost per unit (66 700/200 units) = 333.50