FUNCTIONAL BASED PRODUCT COSTING

Exhibit 4-1 shows a general functional-based product costing model. Assigning the
cost of direct materials and direct labor to products proses little challenge. The
costs can be assigned to products using direct tracing, and most functional-based
costing system are designed to ensure that this tracing takes place. Overhead costs,
on the other hand, pose a different problem. The physically observable input-output
relationship that exists between direct labor, direct materials, and products is
simply not available for overhead. Thus, assignment of overhead must rely on driver
tracing and perhaps on allocation. Functional-based costing first assign overhead
coast to a functional unit, creating either plantwide or departmental cost pools.
These pooled costs are then assigned to products using predetermined overhead
rates based on unit level drivers.
A predetermined overhead rate is calculated at the beginning of the year using the
following formula. Overhead rate = budgeted annual overhead/budgeted annual
driver level.
Predetermined rates are used because overhead and production often are incurred
non uniformaly throu