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Chapter 9 - Absorption Costs Systems
Chapter 10 - Criticisms of Absorption Cost Systems: Incentive to Overproduce
Chapter 11 - Criticisms of Absorption Cost Systems: Inaccurate Product Costs
Please read and study Chapters 9, 10 and 11 in your Zimmerman text. in your Zimmerman text. Managerial Accounting for Decision Making 9th Edditions
There are three general methods of allocating overhead costs: plant wide rates, rates for each expense category, and departmental rates. Describe and discuss when each is the most useful. Assignment Outcomes Explain the basics of cost allocation theory. Evaluate course concepts critically and competently through interaction with Learners and faculty mentor.
Explanation / Answer
Three methods of allocating overhead costs:
Plant wide rates, Rates for each expense category and departmental rates.
A plan wide overhead is used to allocate all of its manufacturing costs to its output production. This is an amount per labor hour or amount per machine hour. This method is used when the company manufactures similar type of products and is not appropriate if the company manufactures diverse products.
This method of overhead allocation costs doesn’t have any information in any of the sources. But as the name implies, it can be described as the method of allocation of cost depending on the category of the expense.
While plant wide overhead rates are used for manufacture of similar products, departmental rates are used when diverse products are manufactured which uses different processes and which has different costs. Hence using departmental overhead rates will better replicate the manufacturing costs for the multiple products instead of plant wide overhead rate.
Basics of cost allocation theory:
Cost allocation is nothing but indirect, or joint costs to various products, process, departments.
Cost allocation:
Common cost is the one which is applicable when the resources are shared by many users.
Cost allocation involves the following steps:
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