Predeterminate Overhead Rate Flashcards
Why are costing systems necessary?
They ensure costing accuracy, crucial for pricing, profitability, and competitiveness.
What is product costing?
Accumulating, classifying, and assigning direct materials, direct labor, and factory overhead to cost objects.
How are direct and indirect costs treated in costing systems?
Direct costs are traced to cost objects; indirect costs are allocated using cost drivers.
What are the three choices in developing a costing system?
Cost accumulation method, cost measurement method, and overhead assignment method.
What is actual costing?
A method using actual costs incurred, rarely used due to cost fluctuation and late availability of information.
What is normal costing?
Uses actual costs for direct materials and labor, but applies overhead using a predetermined rate.
What is standard costing?
Uses standard costs for all elements to support cost control, performance evaluation, and process improvement.
What is factory overhead application?
Allocating factory overhead costs to cost objects because they cannot be directly traced.
What is the predetermined overhead rate (POHR)?
An estimated rate used to apply overhead costs to specific cost objects throughout the year.
How is POHR calculated?
POHR = Estimated total overhead ÷ Estimated total cost driver activity.
List common volume-based cost drivers.
Direct labor hours, machine hours, number of setups, number of orders, manufacturing cycle-time.
When is the POHR calculated?
At the beginning of the year, based on budgeted estimates.
How is overhead applied during the year?
Overhead Applied = POHR × Actual activity.
If a machine shop budgets $80,000 overhead, 4,000 labor hours, and 8,000 machine hours, what is the POHR based on labor hours?
$80,000 ÷ 4,000 labor hours = $20 per labor hour.
What is the POHR based on machine hours in the same case?
$80,000 ÷ 8,000 machine hours = $10 per machine hour.
Which cost driver should a machine shop prefer for applying overhead?
Machine hours, because machines are the main resource used in production.
