Chapter 4

A grouping of individual indirect cost items. Can range from broad, such as all manufacturing-plant costs, to narrow, such as the costs of operating metal-cutting machines.

These simplify the allocation of indirect costs because the costing system does not have to allocate each cost individually.

A systematic way to link an indirect cost or group of indirect costs to cost objects.

When the cost object is a job, product, service, or customer, the cost-allocation base may be called this. However, when the cost object is a department or another cost pool, the cost-allocation base is not called this.

In this system, the cost object is a unit or multiple units of a distinct product or service called a job. Each job generally uses different amounts of resources. The product or service is often a single unit.

In this system, the cost object is masses of identical or similar units of a product or service. In each period, this system divides the total costs of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost. This per-unit cost is the average unit cost that applies to each of the identical or similar units produced in that period.

A costing system that traces direct costs to a cost object based on the actual direct-cost rates times the actual quantities of the direct-cost inputs used. Indirect costs are allocated based on the actual indirect-cost rates times the actual quantities of the cost-allocation bases.

Actual annual indirect costs / Actual annual quantity of the cost-allocation base

Budgeted annual indirect costs / Budgeted annual quantity of the cost-allocation base

A costing system that (1) traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs and (2) allocates indirect costs based on the budgeted indirect-cost rates times the actual quantities of the cost-allocation bases.

An original record that supports journal entries in an accounting system.

Example, a labor time card on which an employee's work hours are recorded.

Used to record and accumulate all the costs assigned to a specific job, starting when work begins.

A basic source document which contains information about the cost of direct materials used on a specific job and in a specific department.

A source document for direct manufacturing labor, which contains information about the amount of labor time used for a specific job in a specific department.

The amount of manufacturing overhead costs allocated to individual jobs based on the budgeted rate multiplied by the actual quantity of the allocation base used for each job. This contains all manufacturing overhead costs assigned to jobs using a cost-allocation base because overhead costs cannot be traced specifically to jobs in an economically feasible way.

Actual indirect costs incurred - Indirect costs allocated/applied/absorbed

Restates all overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates.

Purpose is to provide an accurate record of actual individual job costs in order to conduct a profitability analysis, learn how to better manage the costs of jobs, and bid on future jobs (and the total under- or overallocated amount is big relative to operating income)

Spreads underallocated or overallocated overhead among ending work-in-process inventory, finished-goods inventory, and cost of goods sold (and materials inventory, if manufacturing overhead costs have been allocated to it).

Purpose is to prepare financial statements using actual manufacturing overhead rates, not budgeted rates (and the total under- or overallocated amount is big relative to operating income and inventory levels are high)

(1) Account balance
(2) Manufacturing overhead in account balance allocated in the current year
(3) (2) / (Total of all (2) accounts)
(4) (3) x amount underallocated (overallocated)
(5) (1) + (4) underallocation or (1) - (4) for overallocation

The total under- or overallocated overhead is included in this year's Cost of Goods Sold. The overhead accounts (control and allocated) are closed with the difference between them included in Cost of Goods Sold.

Purpose is to prepare financial statements using actual manufacturing overhead rates, not budgeted rates (and total under- and overallocated amount is small relative to operating income or inventory levels are low).