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CA5 Accounting For Factory Overhead

This document discusses different methods for allocating factory overhead and service department costs in cost accounting. It covers the traditional and activity-based costing (ABC) methods for allocating factory overhead, as well as plant-wide and departmental overhead rates. For service department cost allocation, it describes the direct, step, and algebraic methods. The learning objectives are to apply overhead allocation methods and compute predetermined overhead rates. Examples are provided to illustrate the ABC and different service cost allocation methods.

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202 views15 pages

CA5 Accounting For Factory Overhead

This document discusses different methods for allocating factory overhead and service department costs in cost accounting. It covers the traditional and activity-based costing (ABC) methods for allocating factory overhead, as well as plant-wide and departmental overhead rates. For service department cost allocation, it describes the direct, step, and algebraic methods. The learning objectives are to apply overhead allocation methods and compute predetermined overhead rates. Examples are provided to illustrate the ABC and different service cost allocation methods.

Uploaded by

hellokittysaranghae
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COST ACCOUNTING AND

CONTROL
ACCOUNTING FOR FACTORY OVERHEAD

Alexsander C. Ong, CPA


Faculty, Polytechnic University of the Philippines – Sta. Rosa Campus
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD

LEARNING OBJECTIVES
After studying this chapter you should be able to:
• Apply both traditional method and ABC method of allocating
overhead
• Compute predetermined overhead rate using plant wide rate and
departmental overhead rate
• Learn how to allocate service costs using the direct method, step
method, and algebraic method
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
ALLOCATION OF FACTORY
OVERHEAD -TRADITIONAL METHOD
❖ Based on direct labor hours or direct labor cost

❖ Based on machine hours


COST ACCOUNTING AND CONTROL
ALLOCATION OF FACTORY
ACCOUNTING FOR FACTORY OVERHEAD

OVERHEAD – ACTIVITY BASED


COSTING (ABC)
ILLUSTRATION. Dragon Furniture Company has identified activity centers to
which overhead costs are assigned. The following data are available:

Required: Determine the TOTAL production cost of each product using ABC
COST ACCOUNTING AND CONTROL
ALLOCATION OF FACTORY
ACCOUNTING FOR FACTORY OVERHEAD

OVERHEAD – ACTIVITY BASED


COSTING (ABC)
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
DEPARTMENTAL RATE VS.
PLANT-WIDE RATE
❖ DEPARTMENTAL RATE
One overhead rate per department, so that if there are two or more processing
departments, two or more OH rates are used to apply overhead to production.

❖ PLANT-WIDE RATE
If only one overhead rate is chosen by a company for the allocation of
manufacturing overhead to different jobs, that overhead rate is called plant
wide rate.
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
DEPARTMENTAL RATE VS.
PLANT-WIDE RATE
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
DEPARTMENTAL RATE VS.
PLANT-WIDE RATE
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD

SERVICE COST ALLOCATION


❖ Service or support department is a unit in an organization that
contributes in a very indirect way to the conversion of raw
materials into a finished product
❖ These service departments provide supports that enables the
production process to take place
❖ The costs incurred in these service departments must be
allocated to production departments in order to determine the
full cost of a product
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
METHODS OF SERVICE COST
ALLOCATION
1. DIRECT METHOD – allocates service costs directly to production
department only and does not consider services provided by one service
department to another.
2. STEP METHOD OR SEQUENTIAL METHOD – allocates service costs step
by step. The service departments are ranked according to the quantity of
services provided by each service department to other service
departments. The service department that provides most service to
other support area is ranked first (benefits-provided ranking). Once cost
has been allocated from a service department, no other service
department’s cost is allocated back to that department.
3. ALGEBRAIC OR RECIPROCAL METHOD – considers all departmental
interrelationships and reflects these relationships in simultaneous
equations.
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
METHODS OF SERVICE COST
ALLOCATION
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
METHODS OF SERVICE COST
ALLOCATION
1. Under the direct method, what are the total services costs
allocated to the machining and assembly departments, respectively?
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
METHODS OF SERVICE COST
ALLOCATION
2. Under the step method of allocating service department costs from
quality control to maintenance, what are the total services costs
allocated to the machining and assembly departments, respectively?
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD
METHODS OF SERVICE COST
ALLOCATION
3. Under the algebraic method, what are the total amount of quality
control costs and total amount of maintenance costs, respectively to
be allocated to the other departments?
COST ACCOUNTING AND CONTROL
ACCOUNTING FOR FACTORY OVERHEAD

REFERENCES
• Advanced Financial Accounting and Reporting Module. CPA Review
School of the Philippines (CPAR)
• Rante, Gloria A. Cost Accounting (2013 Edition). Millenium Books, Inc.

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