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5-1
Manufacturing firms
Combines direct materials, direct labor, and
overhead to produce a new product.
Service firms
Provide a service.
So what is a beauty salon? Or a restaurant?
Both use tangible products, but both provide a
service.
There are elements of both.
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Ethics
Customers may perceive greater risk when buying
services.
Manufacturers can offer warranties or product
replacement.
A service that is unsatisfactory also costs the
customer time.
Therefore service providers must be very careful to
deliver what they promise.
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Actual costing
Actual direct materials, direct labor and manufacturing
overhead
Actual manufacturing overhead has timing problems.
Normal costing
Actual direct materials and labor
Applied overhead based on a predetermined overhead
rate.
Because the predetermined overhead rate is
calculated using budgeted overhead and drivers, the
timing issue is eliminated.
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Choosing
Choosing the
the Activity
Activity Level
Level
Is the production level the firm expects to attain for the coming
year
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Accounting
Accounting for
for Overhead
Overhead
Applied Overhead
Actual Overhead
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Accounting
Accounting for
for Finished
Finished Goods
Goods Inventory
Inventory
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Accounting
Accounting for
for Cost
Cost of
of Goods
Goods Sold
Sold
Overhead variances
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Accounting
Accounting for
for Cost
Cost of
of Goods
Goods Sold
Sold
Accounting
Accounting for
for Nonmanufacturing
Nonmanufacturing Costs
Costs
expenses
These costs are period costs and never
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Activity-Based Costing
A single rate based on direct labor hours may
result in inaccurate cost assignments.
Departmental overhead rates and activity-based
costing can be used with job-order costing.
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Normal Spoilage
Is expected waste due to the nature of the
production process.
This is subsumed in the overhead rate and
spread among all jobs.
Abnormal Spoilage
Is due to the exacting nature of a particular job.
This is charged to the particular job.
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