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Cost assignment

13 important questions on Cost assignment

Job order costing system

A job order costing system is a cost assignment system that assigns cost to product in a manufacturing firm that produces unique products in batches, and where the products incur different costs resulting in the need to keep track of the costs of each product or batch

Cause-and-effect allocations / driver tracing

This therm is used where allocation bases are significant determinants.

Plant-wide or blanket overhead rates

The most simplistic traditional costing system assigns indirect costs to cost objects using a single overhead rate, known als the plant-wide or blanket overhead rate. First, you calculate the total overhead costs and divide them by the allocation based to reach an overhead rate. The overhead rates are then allocated by multiplying the plant-wide overhead rate by the units of allocation base per product. A plant wil rate will generally result in the reporting of inaccurate product costs and can only be justified when all products consume departmental overheads in approximately the same proportions.

Two stage allocation process

In the first stage, overheads are assigned to cost centers (=cost pools). In the second stage, the costs accumulated in the cost centers are allocated to cost objects using selected allocation bases.

Two stage allocation process: 4 steps

1. Assigning all manufacturing overhead to production and service cost centers
2. Reallocating the costs assigned to service costs center to production cost centers
3. Computing separate overhead rate for each production cost center
4. Assigning cost center overhead to products or other chosen cost objects.

Budgeted overhead rate (BOHR)

A budgeted overhead rate is based on annual estimated overhead expenditure and activity.

Fixed overhead expenditure variance

When using budgeted overhead rates, there will almost always be an under- or over-recovery of overheads as a result of volume variance: actual activity differs from budgeted activity. Any under- or over-recovery resulting from actual fixed overhead expenditure differing from budget is als called fixed overhead expenditure variance.

Indirect cost assignment process

1. Identify the production departments that are responsible for creating the products/services sold.
2. Identify the support departments that provide essential support services for the production department.
3. Assign all indirect (overhead) costs in the firm to a production or support department.
4. Reallocate the support department costs to the production departments
5. Calculate predetermined overhead rates for each production department.
6. Allocate the departmental overhead costs to the units of the individual products or services using the overhead rates.

Service departments may provide services for other service departments as well as for production departments. There are four different methods of allocating service department costs:

1. Repeated distribution (reciprocal) method
2. Simultaneous equation method
3. Specified order of closing method
4. Direct allocation method

Repeated distribution (reciprocal) method

The service department costs are repeatedly allocated in the specified percentages until the figures become to small to be significant.

Simultaneous equation method

This basically does the same as the reciprocal method, but the numbers are derived by setting up an equation system and solving for the x and y (and z etc)

Specified order (=sequential = step allocation method) closing

The service departments' overheads are closed in a certain order; the one that does the largest proportion of work for other departments is closed first and so on. Return charges are not made to service departments whose costs have previously been allocated. This method sacrifices accurace for clerical convenience.

Direct allocation method

It ignores inter-service department service reallocations. The service department costs are thus only reallocated to production departments. This method is the simplest, but also not ver accurate.

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Cost assignment

13 important questions on Cost assignment

Job order costing system

Cause-and-effect allocations / driver tracing

Plant-wide or blanket overhead rates

Two stage allocation process

Two stage allocation process: 4 steps

Budgeted overhead rate (BOHR)

Fixed overhead expenditure variance

Indirect cost assignment process

Service departments may provide services for other service departments as well as for production departments. There are four different methods of allocating service department costs:

Repeated distribution (reciprocal) method

Simultaneous equation method

Specified order (=sequential = step allocation method) closing

Direct allocation method

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