Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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- Budgeted indirect costs and end-of-period adjustments
| Job costing in manufacturing Emphasise that Chapter 3 explains how manufacturing costs are attached to products. The cost to manufacture a product is necessary for external reporting (e.g. stock and CGS) and internal decisions (e.g. pricing. Concepts introduced here provide a foundation for subsequent topics including relevant costs and pricing, cost allocation, progress costing, flexible budgets and variance, analysis and operations and backflush costing. Budgeted indirect costs and end-of-period adjustments Underallocated MOH (UAO) and overallocated MOH (OAO) arise for two reasons (1) the numerator reason, actual MOH costs ≠ budgeted MOH costs and/or (2) the denominator reason, actual quantity of the allocation base consumed ≠ budgeted quantity. In the Wallace Co. example, budgeted MOH is €1,280,000, whereas actual MOH is €1,200,000, so the numerator reason leads to €80,000 OAO (budgeted costs ≥ actual costs. However, actual MHs (the allocation base) were only 12,500 rather than the budgeted 16,000 MH. The denominator reason leads to (16,000 MH – 12,500 MH × €80/MH budgeted MOH rate) = €280,000 UAO. The net effect is €280,000 UAO – €80,000 OAO = €200,000 UAO. The adjusted allocation rate approach to under- or overallocated MOH corrects account balances to what they would have been, had accountants had a crystal ball and forecasted MOH cost and quantity of the allocation base perfectly. The feasibility of implementing the adjusted rate approach increases as information progressing costs decline. Proration based on the total amount of indirect costs allocated (method 1) corrects WIP, FG and CGS control closing balances to what they would have been under actual costing, yielding the same closing balances as the adjusted allocation rate approach. The difference is that the adjusted allocation rate method also corrects the individual jobs, whereas proration method 1 corrects only the control account closing balances. It is conceptually preferable to prorate on the basis of the amount of MOH allocated embedded in each account’s EB (method 1). This yields the EB that would have been obtained had the correct (i.e. actual) MOH rate been used. However, many companies that prorate UAO/OAO do so via the EB method (method 2) because the EB of WIP, FG and CGS are readily available. In contrast, the amount of MOH – allocated embedded in EB – maybe more difficult to obtain. Download 1.72 Mb. Share with your friends:
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