Ch 4 Flashcards
What are the 3 OH allocation methods:
- Plantwide rate method
- Departmental rate method
- Activity-based costing (ABC)
Using a single overhead rate to apply overhead to products is called the
plantwide overhead rate method.
Landen Company uses a single plantwide overhead rate of $100 per direct labor hour (DLH). Landen has two products as follows: basic chairs which used 20 DLH and deluxe chairs which used 35 DLH. What is the total amount allocated to these products?
$5,500
The total is computed as: (35+$20 DLH) x $100=$5,500.
The plantwide overhead rate can be based on:
direct labor hours
machine hours
Each of the following are types of …….. allocation methods: plantwide rate method, departmental overhead rate method and activity-based costing method.
Overhead
The …….
overhead rate method uses a different overhead rate per production department.
Departmental
True or false: The cost object of the plantwide overhead rate method is the unit of product.
True
Reason: This true. The unit of product is the target of cost assignment under the plantwide method.
True or false: The departmental overhead rate method uses a three-step process where costs are assigned to cost pools in the first step and overhead rates are computed in the last step.
False
Reason: In the step 1, overhead costs are assigned to department cost pools. In step 2, an allocation base is selected and an allocation rate is computed and in step 3, the overhead costs are assigned to the cost objects.
Under the plantwide overhead rate method, total budgeted overhead costs are divided by the chosen allocation base to determine the
one overhead cost rate
The departmental overhead rate method allows individual departments to have
their own overhead rate and allocation base.
True or false: The plantwide overhead rate method uses multiple rates to allocate overhead costs to products.
False
A company uses the departmental overhead rate method. Total overhead costs are $6,000,000. Of this total, the machining department is assigned overhead costs of $4,000,000 and the assembly department is allocated the remainder. The machining department uses machine hours as their allocation base and has 80,000 machine hours. The assembly department uses direct labor hours as their allocation base and has 50,000 direct labor hours. Calculate the overhead rate for the assembly department.
$40 per direct labor hour
Reason: $2,000,000/50,000 direct labor hours=$40 per direct labor hour.
The plantwide overhead rate method can be based on each of the following except
machine hours
direct labor hours
supervisor hours
supervisor hours
The overhead rate method which uses a different overhead rate for each department is the
departmental method
The weakness of the departmental and the plantwide overhead rate methods is that
overhead cost is often too complex to be explained by direct labor hours or machine hours.
The departmental overhead rate method uses a three-step process to allocate costs objects. List these steps in the correct order:
- Assign OH cost to departmental cost pools
- Select allocation base and compute OH allocation rate for each dept.
- Allocate OH costs to cost objects
True or false: One of the advantages of the departmental overhead rate method over the plantwide overhead rate method is that in the departmental overhead rate method, individual departments can have their own overhead rate and allocation base.
True
The plantwide overhead rate method is most appropriate for companies which have
a single product.
A company uses the departmental overhead rate method. Total overhead costs are $5,000,000. Of this total, the machining department is assigned overhead costs of $4,000,000 and the assembly department is allocated the remainder. The machining department uses machine hours as their allocation base and has 80,000 machine hours. The assembly department uses direct labor hours as their allocation base and has 50,000 direct labor hours. Calculate the overhead rate for the machining department.
$50.00 per machine hour
Reason: $4,000,000/80,000 machine hours=$50 per machine hour.
The two assumptions regarding the usefulness of the single plantwide overhead rate method includes:
all products use overhead costs in the same proportion
overhead costs change with the allocation base
As it relates to the departmental overhead rate method, when products differ in batch size and complexity, they usually consume _____ amounts of overhead costs.
different
Strengths of the departmental overhead rate method and the plantwide overhead method include all of the following:
They are easy to implement.
They are based on readily available information.
They comply with GAAP.
In activity-based costing, costs are first traced to ______ , activity rates are computed, and then allocated to ______.
activities; cost objects
True or false: The usefulness of the single plantwide overhead rate method depends on assuming that overhead costs change with the allocation base and all products use overhead costs in the same proportions.
True
The main advantage of the plantwide overhead rate method is:
it is easy to implement
The two main assumptions of the departmental overhead rate method include:
different products are similar in volume, complexity and batch size
departmental overhead costs are proportional to the departmental allocation base
The basic principle of activity-based costing is that a(n) …….
is what causes overhead cost to be incurred.
activity or activities
Activity-based cost systems allocate costs by focusing on …..
.
activity or activities
In the ……(third,fourth) stage of activity-based costing, overhead allocation rate is determined for each activity.
Third
Identify the three steps in activity-based costing Rank these in the correct order.
- Identify activities and assign budgeted costs to activity pools
- Computer OH activity rate for each activity cost pool
- Allocate OH costs to cost objects
Activity cost pools are:
group of costs related to the same activity
……. (Identifying, Assigning,Tracing) activities is the first step in applying activity-based costing.
Identifying
The basis of the activity-based costing method is a(n)
activity
A cost driver is
a factor that causes activity to go up or down.
In the ……
(first/second) stage of activity-based costing the activities and overhead costs are identified.
first
When using activity-based costing, it is very important that the activities in each cost pool are
similar
The third step in activity-based costing is to
allocate costs to cost objects.
Match the activity to the most appropriate cost driver.
production
setup
factory services
design
And
direct labor hours
Number of setups
Number of design changes
square feet
production: direct labor hours
setup: Number of setups
factory services: square feet
design: Number of design changes
An activity cost ……
is a group of costs that are related to the same activity.
pool or pools
A company has the following activities and costs: machine setup of $5,000 per setup and factory services of $100 per square foot. If product 1 uses 2 setups and has 10,000 square feet, overhead allocated to product 1 is $
1,010,000
Reason: (5,000×2)+(100×10,000)
The first step in applying activity-based costing is
identifying the activities.
The Factory Services Department incurs costs of $130,000 while maintaining machinery that is operated 1,000,000 machine hours. If Job 276 requires 1,500 machine hours, the amount of costs allocated to the job will be $
195
Reason: find cost per machine hrs first (total cost/total machine hrs) = 130,000 ÷ 1,000,000 = 0.13
Next, find cost for job 276 (cost per machine hrs × machine hrs for job 276) = 0.13 × 1,500 = $195
A cost ….. is a factor that causes the cost of an activity to go up or down.
driver
Jackson Company uses activity-based costing to allocate their overhead costs. Setup costs of $850,000 are based on number of batches. Design modification costs of $155,000 are based on number of design changes. Jackson Company has identified 40,000 batches and has 5,000 design changes in their factory. What is the activity rate for setup.
$21.25
Reason: 850,000/40,000 = 21.25
In activity-based costing, activities in each cost pool should be (similar / dissimilar) …..
.
similar
Phillip Company uses activity-based costing. Phillip Company produces two types of lamps, floor lamps and table lamps. The floor lamp requires 15 setup activities at $60 per setup and 5 design changes at $50 per design. If Phillip Company produces 1,200 floor lamps, what is the total overhead cost per floor lamp? Round your answer to two decimal places.
$0.96
Reason: (15x$60)+(5x$50)=$1,150/1,200=.9583 rounded to 0.96.
If a company uses activity-based costing, the most appropriate cost driver for the production department would be the:
number of direct labor hours
Activities causing overhead include all of the following:
batch-level
unit-level
facility-level
& product lvl
Johnson Company has the following overhead costs: machine setup $25,000; factory services $10,000; design of $15,000; and selling expenses of $5,000. What is the total overhead costs using activity-based costing?
$50,000.
Reason: $25,000 + $10,000 + $15,000 = $50,000. (Don’t add selling expense)
Activities which are focused at the unit level are called
unit level activities
The Production Department incurs costs of $250,000 while working 12,500 direct labor hours. If Job 421 requires 25 direct labor hours to assemble, the amount of overhead allocated to the job will be $
500
Reason: (250,000÷12,500)×25
Spring Company uses activity-based costing to allocate their overhead costs. Setup costs of $100,000 are based on number of setups. Factory services of $65,000 are based on square footage. Spring Company has identified 500 setups and has 10,000 square feet in their factory. What is the activity rate for the setup activity cost pool.
$200.00
Reason: $100,000/500 setups =$200.
A …… (unit, batch, product, facility) level activity are those that are performed on each group of units.
Batch
Mobile Company uses activity-based costing. One of their products, a phone, requires 20 setup activities at $50 per setup and 15 design changes at $1,000 per design. If Mobile Company produces 2,000 phones, what is the total overhead cost per unit?
$8.00
Reason: (20x$50)+(15x$1,000)=$16,000. $16,000/2,000=$8.00.
…… (Product, facility, batch) level activities are focused on the whole facility and are not caused by units.
Facility
An activity which is related to the facility capacity as a whole is a
facility level activity.
….. (Unit, Batch, Product) activities are performed on each product unit.
Unit
Advantages of the activity-based costing include:
better production and pricing decisions
accurate assignment of costs to products
more effective overhead cost control
A batch level activity will vary with the
number of batches.
An activity which focuses on product lines and are not affected by number of units is a
product level activity.
Costs to implement an activity-based system are considered a …..
(advantage, disadvantage) of this system.
disadvantage
In order for a service provider to use activity-based costing, they should classify costs by …..
level.
activity
One of the characteristics of activity-based costing is that it allows …..
(more, less) effective control over costs.
more
A report which focuses on individual customers and shows total profit margin generated by specific customers is known as a ……
profitability report.
customer
Disadvantages of using activity-based costing includes all of the following:
cost to implement.
product cost can be distorted.
ABC can be used by service providers who usually classify costs by
activity level
A report which focuses on providing gross profit margin per customer, is referred to as a
customer profitability report.
A disadvantage of using activity-based costing is that
collecting and analyzing cost data is expensive.
HW CONCEPT VIDS
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Select from the three alternative methods of overhead allocation in the drop down list so that it matches with the provided feature.
Items
Item number 1: Overhead allocation based on one rate.
Item number 2: Overhead allocation based on two or more rates.
Item number 3: Overhead allocation using many rates.
- Plantwide rate
- Departmental rate
- ABC
When using the plantwide overhead rate method, the cost object is
unit of product
Huffington Company uses a plantwide overhead rate to apply overhead. The predetermined overhead rate is based on machine hours. At the beginning of the year, the company made the following estimates: direct labor hours of 16,000, direct labor cost of $200,000, machine hours of 5,000, and total overhead costs of $25,000. On a per machine hour basis, the company’s plantwide overhead rate is:
$5.00
Reason: 25,000÷5,000
Place the following Departmental Overhead Rate Method steps in the correct order.
Items
Item number 1: Assign budgeted overhead cost to departmental cost pools.
Item number 2: Allocate overhead costs to cost objects.
Item number 3: Select an allocation base and compute an overhead allocation rate for each department.
- Step 1
- Step 3
- Step 2
Machining Assembly
Direct labor hrs: 16,000 12,000
Direct labor cost: $20,000 $15,000
Machine hours: 5,000 1,000
Overhead: $25,000 $30,000
Assuming that overhead in the machining department is allocated on the basis of machine hours, the departmental overhead rate per unit of the allocation base in the Machining Department is:
$5
Reason: 25,000÷5,000
Shepherd Company manufactures two types of shoes – sneakers and boots. Each sneaker requires 2 direct labor hours and boots require 1.5 direct labor hours. The overhead rate per direct labor hour is $2. Direct materials for sneakers and boots is $15 and $20, respectively. Direct labor for sneakers and boots is $5 and 7, respectively. The total unit cost for each product is:
Reason:
Sneakers: (2×2)+15+5
Boots: (2×1.5)+20+7
If overhead cost does not bear a relation to the allocation base, allocating overhead cost using a single plantwide overhead rate can:
lead to poor managerial decisions
distort product cost
In step _________blank in activity-based costing, overhead costs are allocated to cost objects.
three
An activity cost driver is a factor that causes:
the cost of an activity to go up or down.
Step 2 of ABC costing is to:
compute activity overhead rate for each activity
In step 3 of ABC, overhead cost is allocated to activities based on the following formula:
actual activity usage times activity rate
The plantwide rate method, compared to activity-based costing can _________blank.
Undercost low-volume complex products
Select the correct type of activity from the drop down list.
Items
Item number 1: Performed only on each batch of units
Item number 2: Performed to sustain facility capacity as a whole
Item number 3: Performed on each unit
Item number 4: Performed on each product line
- Batch lvl
- Facility lvl
- Units lvl
- Product lvl
Select the type of activity from the drop down list.
Items
Item number 1: Recycling hazardous waste
Item number 2: Cleaning factory
Item number 3: Assembling components
Item number 4: Controlling inventory
- Batch lvl
- Facility lvl
- Unit lvl
- Product lvl
An advantage of ABC costing is:
can be used to identify activities that can benefit from process improvement
Budgeted customer support cost for Liton Company is $100,000 for the year and budgeted technician miles is 1,000 per year. Liton Company’s customer support activity rate is $ _________blank per mile.
Activity rate $100 per mile
Reason: 100,000÷1,000
Service companies classify costs by activity level including unit, batch, service, and facility. An example of a service level activity for a hotel is:
scheduling personnel
The first step for a service provider using ABC is:
identify activities and their budgeted overhead cost
CH4 HW (most are pics on phone)
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Neal Company allocates overhead cost using a single plantwide overhead rate of $20 per direct labor hour. Each product unit uses three direct labor hours.
Compute the overhead cost per unit.
Plantwide Overhead Rate: $20.00
Allocation base: per direct labor hours
Hours used: 3
Overhead cost per unit: $60 per unit (20 × 3)
