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Flashcards in Chapter 2 Deck (5)
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1
Q

When are Job-order costing systems used?

A
  • Many different products are produced each period.
  • Products are manufactured to order.
  • The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
2
Q

Why use an Allocation Base?

A

We use an allocation base because:

  • It is impossible or difficult to trace overhead costs to particular jobs.
  • Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
  • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
3
Q

Why use a Predetermined Overhead Rate (POHR)?

A
  • Actual overhead for the period is notknown until the end of the period, thus inhibiting the ability to estimate job costs during the period.
  • Actual overhead costs can fluctuate seasonally, thus misleading decision makers.
4
Q

What is a Plantwide Overhead Rate?

A

Many companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours.
- It is often overly-simplistic and incorrect to assume that direct-labor hours is a company’s only manufacturing overhead cost driver.
0 If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.

5
Q

What is Activity Based Costing?

A

When a company creates overhead rates based on the activities that it performs, it is employing an approach called activity-based costing.

Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.