ACCT 2102 1st Edition Exam # 2 Study Guide Lectures: 10 - 18

Here is the outline of the test:

Chapter 4 2 conceptual and 4 calculation

Chapter 5 2 conceptual and 5 calculation

Chapter 6 4 conceptual and 3 calculation

1 extra credit question as a bonus

Below are conceptual and mathematical ideas, which may or may not be on the test. Farmer says nothing outside of the notes we did in class will be on the test; therefore, a book is not required unless needed for own personal reference. Again, nothing in Chapters 4, 5, or 6 that were not in the notes will be on the test. She gave hints in class about what some of the conceptual questions would be, so if there is an asterisk* beside a concept then it will 100% be on the test.

Chapter 4: Lecture 10 (September 9), Lecture 11 (September 11), Lecture 12 (September 13), and Lecture 13 (September 16) Two ways of depicting a more accurate allocation of MOH which will be discussed throughout this chapter are:

• Departmental Overhead Rates

• Activity Based Costing

Traditional Costing System . . . Plant-wide Overhead Rate

 Calculate the company’s plant-wide overhead rate, assuming the company uses DL hours as its allocation base.

Refined Costing System . . . Departmental Overhead Rates

 Calculate departmental overhead rates, assuming the company would use machine hours as the allocation base for the Machining department and DL hours as the allocation base for the Assembly department. DM and DL remain the same in both the Traditional and Refined Costing Methods.

Cost distortion: Over- or under-costing your job when running two systems (traditional and refined) simultaneously; caused by difference in resource consumption

What is the goal of ANY refined costing system? Increase accuracy to get a true picture of what our costs are

Can refined costing systems only be used to allocate MOH at manufacturers? No

What are the key steps in implementing ABC?

1. Identify the activities and estimate the total MOH costs associated with each activity. These are called “activity cost pools.”

• Unit Level- activity we perform on all of our units

• Batch Level- activity we perform on a group of units

• Product Level- activity we perform on an individual product line

• Facility Level- activity we perform on everything else

2. Choose an allocation base for each activity

• Consider true cost driver when making this selection

3. Calculate a POHR for each activity

4. Allocate the indirect costs.

Circumstances favoring the implementation of ABC  Offers multiple products

 Consume at different rates than under the traditional system

ABC will often uncover that a high volume product has been overcosted.

*Great mathematical problem to review because a similar problem WILL be on the test. Also keep in mind that “per unit cost” and “total cost” will be different!

Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy. Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit production costs. The following information has been prepared:

(GIVEN)

Activity Cost Driver Cost Pool

Assembly DL Hours $500

Machining Machine Hours $1,500

Setting Up Equipment Number of Setups $1,200

Moving Goods Number of Moves $800

(WORKED)

Activity Cost Driver Cost Pool Acoustic Electric Total

Assembly DL Hours $500 20 DL hours 80 DL Hours 100 DL hours

Machining Machine $1,500 10 M Hours 40 M Hours 50 M Hours Hours

Setting Up Number of $1,200 4 Setups 4 Setups 8 Setups Equipment Setups

Moving Number of $800 1 Move 4 Moves 5 Moves Goods Moves

Total $4,000

Each Acoustic guitar requires 1 direct labor hour and .5 machine hours to produce. Each Electric guitar requires .8 direct labor hours and .4 machine hours to produce. The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced. Acoustic guitars are moved during production in groups of 20 guitars; Electric guitars are moved during production in groups of 25 guitars.

The direct material cost per Acoustic guitar is $60 and the direct material cost per Electric guitar is $70. Direct Laborers are paid at a rate of $25 per hour. The projected production levels for the period are 20 Acoustic guitars and 100 Electric guitars.