Unit 2

Question 1

Underapplied or overapplied overhead

Answer 1

The difference between the overhead cost applied to Work in Progress and the actual overhead costs of a period

Question 2

At the beginning of the period

Answer 2

Predetermined Overhead rate = ESTIMATED Total Manufacturing Overhead ÷ ESTIMATED Total units in the allocation base

Question 3

During the period

Answer 3

Total manufacturing overhead applied = Predetermined overhead rate + ACTUAL Total units of the allocation base incurred during the year

Question 4

At the end of the period

Answer 4

Under/overapplied overhead = ACTUAL Total manufacturing overhead cost - Total manufacturing overhead applied

If ACTUAL overhead is greater than APPLIED overhead, then it’s UNDERapplied
If ACTUAL overhead is less than APPLIED overhead, then it’s OVERapplied

Question 5

Disposition of overhead balances

Answer 5

Cost of goods sold
Allocated between accounts (work-in-progress, finished goods, cost of goods sold)

Question 6

Closing of cost of goods sold by INCREASING balance

Answer 6

DR Cost of good sold
CR Manufacturing overhead

Question 7

Closing cost of goods sold by DECREASING the balance

Answer 7

DR Manufacturing overhead
CR Cost of good sold

Question 8

Underapplied overheads

Answer 8

This makes the balances of work-in-progress, finished goods and cost of goods sold to INCREASE

Question 9

Overapplied overhead

Answer 9

This makes the balances of work-in-progress, finished goods and cost of goods sold DECREASE

Question 10

Predetermined overhead rate on estimated capacity

Answer 10

Estimated total manufacturing overhead cost ÷ Estimated total units in the allocation base

Means the unit product costs will fluctuate depending on the budgeted level of activity for the period.

Question 11

Predetermined overhead rate on activity at capacity

Answer 11

Total manufacturing cost at capacity ÷ Total units in the allocation base at capacity

Remains constant and would not be affected by the level of activity during a period.
Will always result in underapplied overhead

Question 12

Operating departments

Answer 12

those departments or units where the central purposes of the organization are carried out
Milling, assembly, painting (manufacturing), surgery department (hospitals)

Question 13

Service department

Answer 13

do not engage directly in operating activities. Rather, they provide services or assistance to the operating departments.
Cafeteria, internal auditing, cost accounting, etc

Question 14

How service department charges operating department

Answer 14

Identify cost driver (allocation base)
Measure consumption of cost driver
Allocate based on relative amount of cost driver as part of overheads applied

Question 15

The need for cost allocation

Answer 15

Allocate bases
Interdepartmental services
Allocating costs by behaviour
Allocation pitfalls to avoid
Allocation of actual or budgeted costs

Question 16

Selecting allocation bases

Answer 16

Many companies use a two-stage costing process. The first stage and mainly the second stage

Question 17

First Stage Allocations

Answer 17

Service department costs are allocated to operating departments.

Question 18

Second Stage Allocations

Answer 18

Operating department overhead costs and allocated service department costs are applied to products

Question 19

Interdepartmental services

Answer 19

Services provided between service departments through 3 methods: step method, direct method, and reciprocal method

Question 20

Direct method

Answer 20

It ignores the services provided by a service department to other service departments and allocates all costs directly to operating departments.

Question 21

Step method

Answer 21

provides for allocation of a service department’s costs to other service departments, as well as to operating departments.
Sequential
allocates costs forward

Question 22

Reciprocal method

Answer 22

gives full recognition to interdepartmental services.
allocates costs both forward and backwards

Question 23

Allocation pitfalls to avoid

Answer 23

Using sale as an allocation base
Allocating fixed costs using a variable activity allocation base

Question 24

Using sale as an allocation base

Answer 24

Departments that increase revenues are penalized by receiving more allocated costs

Question 25

Allocating fixed costs using a variable activity allocation base

Answer 25

Total fixed costs do not change, but departments that increase activities to support increased revenues are penalized by receiving more allocated costs