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TRADITIONAL PRODUCT COSTING METHODS
Accounting Principles II
AC 2102 - Fall Semester, 1999
1st: What costs are included in total cost?
2nd: Should actual or estimated costs be used in the calculation?
3rd: How do we associate indirect costs with the product?
(1) Delays in collecting (or determining) actual overhead costs impedes producing unit cost data on a timely basis
(2) Substantial fluctuations result in the calculated monthly unit costs of product
Note: Both these disadvantages are caused by the process of assigning actual overhead costs to products
(1) Monthly fluctuations in the amount of overhead incurred by the company
- sometimes called the “numerator problem”
(2) Monthly fluctuations in the level of production, i.e.., the number of units produced
- sometimes called the “denominator problem”
Budgeted OH $/ Bugeted Activity Usage
Note: once the rate is determined, overhead is mechanically charged just as it would if an actual cost rate was being applied
Total Applied = Overhead Rate x Actual Activity Output
- The difference between the total actual overhead incurred and the total applied overhead assigned to production
- If the actual overhead is greater than the the total applied overhead
- If the actual overhead is less than the the total applied overhead
- Use direct tracing, driver tracing and cost allocation to assign (distribute) overhead costs to departments