{"id":815,"date":"2021-03-17T20:59:30","date_gmt":"2021-03-17T20:59:30","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&p=815"},"modified":"2021-08-02T21:10:31","modified_gmt":"2021-08-02T21:10:31","slug":"putting-it-together-allocating-manufacturing-overhead","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/putting-it-together-allocating-manufacturing-overhead\/","title":{"raw":"Putting It Together: Allocating Manufacturing Overhead","rendered":"Putting It Together: Allocating Manufacturing Overhead"},"content":{"raw":"Using a plant-wide or single overhead rate when a business manufactures or produces a single product or provides a single service is feasible and generally accurate. However, in a business with multiple departments and manufacturing sections, a much more accurate overhead rate can be calculated through cost allocation per department. For example, in a business that produces dozens of products, it is essential to know the cost of producing each of them.\r\n\r\nOne reason to know the exact cost relates to the price, but unless the product or service is priced on a cost-plus basis, it\u2019s really the market (consumers) that sets the price based on competition and the free-market system in most cases. However, knowing the exact cost of an item can help a business determine whether or not to continue producing that item.\r\n\r\n\"Pasta\r\n\r\nThat said, there are some instances when producing a product at a loss is done in order to make a profit on complementary items. For instance, a company may be willing to lose money making printers in order to make a profit selling toner and ink cartridges.\r\n\r\nIf we go back to our original example of parsing out costs, where the Sales Manager, the Production Manager, and the Cost Accountant went out to dinner, we can see the direct costs (dinners, wine) and the indirect (shared) costs, like dessert and the appetizer, and even the variable overhead costs, which would be the tip in this example, and how a cost accountant would take more time and effort to allocate costs as accurately as possible, rather than just splitting the cost evenly. However, the cost accountant would also be aware that some costs might be unavoidable and allocated differently if the \u201cproduct mix\u201d (the diners) was different. For instance, if the Product Manager had not shown up, the appetizer and dessert would be allocated differently (assuming they are unavoidable costs).\r\n
\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Description<\/span><\/th>\r\nItem Price<\/span><\/th>\r\nSM<\/th>\r\nPM<\/th>\r\nCA<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n
Steak Dinner<\/td>\r\nSingle Line<\/span>$ \u00a0 50.00<\/td>\r\nSingle Line<\/span>$ \u00a0 50.00<\/td>\r\nSingle Line<\/span><\/td>\r\nSingle Line<\/span><\/td>\r\n<\/tr>\r\n
Pasta Special<\/td>\r\n$ \u00a0 30.00<\/td>\r\n<\/td>\r\n$ \u00a0 30.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Caesar Salad<\/td>\r\n$ \u00a0 16.00<\/td>\r\n<\/td>\r\n<\/td>\r\n$ \u00a0 16.00<\/td>\r\n<\/tr>\r\n
Appetizer<\/td>\r\n$ \u00a0 24.00<\/td>\r\n$\u00a0 \u00a0 4.00<\/td>\r\n$\u00a0 \u00a0 4.00<\/td>\r\n$ \u00a0 16.00<\/td>\r\n<\/tr>\r\n
Wine - glass<\/td>\r\n$ \u00a0 30.00<\/td>\r\n$ \u00a0 30.00<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Wine - glass<\/td>\r\n$ \u00a0 30.00<\/td>\r\n$ \u00a0 30.00<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Wine - glass<\/td>\r\n$ \u00a0 30.00<\/td>\r\n<\/td>\r\n$ \u00a0 30.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Dessert<\/td>\r\n$ \u00a0 15.00<\/td>\r\n$\u00a0 \u00a0 5.00<\/td>\r\n$\u00a0 \u00a0 5.00<\/td>\r\n$\u00a0 \u00a0 5.00<\/td>\r\n<\/tr>\r\n
\u00a0 Subtotal<\/td>\r\nSingle Line<\/span>$\u00a0 225.00<\/td>\r\nSingle Line<\/span>$\u00a0 119.00<\/td>\r\nSingle Line<\/span>$ \u00a0 69.00<\/td>\r\nSingle Line<\/span>$ \u00a0 37.00<\/td>\r\n<\/tr>\r\n
\u00a0 Tip<\/td>\r\n$ \u00a0 45.00<\/td>\r\n$ \u00a0 23.80<\/td>\r\n$ \u00a0 13.80<\/td>\r\n$\u00a0 \u00a0 7.40<\/td>\r\n<\/tr>\r\n
Total<\/td>\r\nSingle Line<\/span>$\u00a0 270.00Double line<\/span><\/td>\r\nSingle Line<\/span>$\u00a0 142.80Double line<\/span><\/td>\r\nSingle Line<\/span>$ \u00a0 82.80Double line<\/span><\/td>\r\nSingle Line<\/span>$ \u00a0 44.40Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nAlso, assume that the group also went bowling, or went to a movie, or included other activities. You should be able to identify the different cost pools and cost drivers related to the different activities you are familiar with on a personal basis, and that will help you identify activities, cost pools, and cost drivers in a production process or even a service organization.\r\n\r\nAs a final note, the use of costing accounting issues like this span a wide variety of organizations, from production to sales to not-for-profit to government. For instance, click here for an in-depth analysis of how the air force uses activity-based costing.<\/a>","rendered":"

Using a plant-wide or single overhead rate when a business manufactures or produces a single product or provides a single service is feasible and generally accurate. However, in a business with multiple departments and manufacturing sections, a much more accurate overhead rate can be calculated through cost allocation per department. For example, in a business that produces dozens of products, it is essential to know the cost of producing each of them.<\/p>\n

One reason to know the exact cost relates to the price, but unless the product or service is priced on a cost-plus basis, it\u2019s really the market (consumers) that sets the price based on competition and the free-market system in most cases. However, knowing the exact cost of an item can help a business determine whether or not to continue producing that item.<\/p>\n

\"Pasta<\/p>\n

That said, there are some instances when producing a product at a loss is done in order to make a profit on complementary items. For instance, a company may be willing to lose money making printers in order to make a profit selling toner and ink cartridges.<\/p>\n

If we go back to our original example of parsing out costs, where the Sales Manager, the Production Manager, and the Cost Accountant went out to dinner, we can see the direct costs (dinners, wine) and the indirect (shared) costs, like dessert and the appetizer, and even the variable overhead costs, which would be the tip in this example, and how a cost accountant would take more time and effort to allocate costs as accurately as possible, rather than just splitting the cost evenly. However, the cost accountant would also be aware that some costs might be unavoidable and allocated differently if the \u201cproduct mix\u201d (the diners) was different. For instance, if the Product Manager had not shown up, the appetizer and dessert would be allocated differently (assuming they are unavoidable costs).<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Description<\/span><\/th>\nItem Price<\/span><\/th>\nSM<\/th>\nPM<\/th>\nCA<\/th>\n<\/tr>\n<\/tbody>\n
Steak Dinner<\/td>\nSingle Line<\/span>$ \u00a0 50.00<\/td>\nSingle Line<\/span>$ \u00a0 50.00<\/td>\nSingle Line<\/span><\/td>\nSingle Line<\/span><\/td>\n<\/tr>\n
Pasta Special<\/td>\n$ \u00a0 30.00<\/td>\n<\/td>\n$ \u00a0 30.00<\/td>\n<\/td>\n<\/tr>\n
Caesar Salad<\/td>\n$ \u00a0 16.00<\/td>\n<\/td>\n<\/td>\n$ \u00a0 16.00<\/td>\n<\/tr>\n
Appetizer<\/td>\n$ \u00a0 24.00<\/td>\n$\u00a0 \u00a0 4.00<\/td>\n$\u00a0 \u00a0 4.00<\/td>\n$ \u00a0 16.00<\/td>\n<\/tr>\n
Wine – glass<\/td>\n$ \u00a0 30.00<\/td>\n$ \u00a0 30.00<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Wine – glass<\/td>\n$ \u00a0 30.00<\/td>\n$ \u00a0 30.00<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Wine – glass<\/td>\n$ \u00a0 30.00<\/td>\n<\/td>\n$ \u00a0 30.00<\/td>\n<\/td>\n<\/tr>\n
Dessert<\/td>\n$ \u00a0 15.00<\/td>\n$\u00a0 \u00a0 5.00<\/td>\n$\u00a0 \u00a0 5.00<\/td>\n$\u00a0 \u00a0 5.00<\/td>\n<\/tr>\n
\u00a0 Subtotal<\/td>\nSingle Line<\/span>$\u00a0 225.00<\/td>\nSingle Line<\/span>$\u00a0 119.00<\/td>\nSingle Line<\/span>$ \u00a0 69.00<\/td>\nSingle Line<\/span>$ \u00a0 37.00<\/td>\n<\/tr>\n
\u00a0 Tip<\/td>\n$ \u00a0 45.00<\/td>\n$ \u00a0 23.80<\/td>\n$ \u00a0 13.80<\/td>\n$\u00a0 \u00a0 7.40<\/td>\n<\/tr>\n
Total<\/td>\nSingle Line<\/span>$\u00a0 270.00Double line<\/span><\/td>\nSingle Line<\/span>$\u00a0 142.80Double line<\/span><\/td>\nSingle Line<\/span>$ \u00a0 82.80Double line<\/span><\/td>\nSingle Line<\/span>$ \u00a0 44.40Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

 <\/p>\n

Also, assume that the group also went bowling, or went to a movie, or included other activities. You should be able to identify the different cost pools and cost drivers related to the different activities you are familiar with on a personal basis, and that will help you identify activities, cost pools, and cost drivers in a production process or even a service organization.<\/p>\n

As a final note, the use of costing accounting issues like this span a wide variety of organizations, from production to sales to not-for-profit to government. For instance, click here for an in-depth analysis of how the air force uses activity-based costing.<\/a><\/p>\n\n\t\t\t

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Candela Citations<\/h3>\n\t\t\t\t\t
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CC licensed content, Original<\/div>