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Homework answers / question archive / Q1) What is the difference between the product cost and period cost? Give some examples for each type Q2
Q1) What is the difference between the product cost and period cost? Give some examples for each type Q2. What do you understand by utilization rate? Give an example Q3. The AMS Manufacturing Company uses a job costing system with machine hours as the allocation base for overhead. The company uses normal costing to develop the overhead allocation rate. The following data are available for the latest accounting period: Estimated fixed factory overhead cost Estimated machine-hours SAR 160,000 100,000 Actual fixed factory overhead cost incurred Actual machine-hours used SAR 170,000 110,000 Jobs worked on: Job No. Machine Hours Used 1020 12,000 1030 18,000 1040 15,000 1050 10,000 a. Compute the overhead allocation rate b. Determine the overhead allocated to job 1040. c. Determine total over or underapplied overhead at the end of the year
Q1. What is the difference between the product cost and period cost? Give some examples for each type
Product costs are all the costs that are incurred during the production or manufacturing of a product or service that is sold by a company. Product costs include parts, materials, components, direct labor, direct and indirect overhead costs, etc. Product costs are basically production costs. On the other hand, period costs are all the other costs that are not related to the production of a good or service offered by the company. Period costs include sales and administrative costs, marketing costs, income tax expenses, etc.
Q2. What do you understand by utilization rate? Give an example
Utilization rate refers to the actual utilization of the resources that a company has available. The most common example of utilization rate is when companies measure the actual production of a facility versus the theoretical maximum possible production. For example, a factory can theoretically produce 10,000 units per day. But the company is currently only producing 7,000 units per day. The utilization rate of the company is 7,000 / 10,000 = 70%. This means that the company is only using 70% of an available resource. The utilization rate can also be calculated for the effective hours that a vehicle is used per day. Assuming that the vehicle’s maximum capacity is 20 hours of use per day, but it is only being used for 12 hours. The utilization rate of the vehicle is 12 / 20 = 60%.
Q3. The AMS Manufacturing Company uses a job costing system with machine hours as the allocation base for overhead. The company uses normal costing to develop the overhead allocation rate. The following data are available for the latest accounting period:
Estimated fixed factory overhead cost SAR 160,000
Estimated machine-hours 100,000
Actual fixed factory overhead cost incurred SAR 170,000
Actual machine-hours used 110,000
Jobs worked on:
Job No. Machine Hours Used
1020 12,000
1030 18,000
1040 15,000
1050 10,000
The predetermined allocation rate = total budgeted overhead / total budgeted machine hours = SAR 160,000 / 100,000 machine hours = SAR 1.60 per machine hour
Since job 1040 required 15,000 machine hours, total allocated overhead = 15,000 machine hours used x SAR 1.60 per machine hour = SAR 24,000
c. Determine total over or underapplied overhead at the end of the year
Total applied overhead = total machine hours used x predetermined allocation rate = 110,000 machine hours x SAR 1.60 per machine hour = SAR 176,000.
Actual overhead expense = SAR 170,000
Overapplied (underapplied) overhead expense = applied overhead expense - actual overhead expense = SAR 176,000 – SAR 170,000 = SAR 6,000 overapplied overhead.
