Acc 212 Ch 17

The basic principle underlying activity-based costing is that a(n) __________ , which is a task, operation, or procedure, is what causes costs to be incurred.

activity

Use the activity overhead rates to assign overhead costs to cost objects (products).

Step 4

The departmental overhead rate method fails to accurately assign overhead costs that are not driven by production volume.

True

Benson, Inc., manufactures a single product. The company's plantwide overhead rate is $25 per machine-hour (MH). Each unit of product requires 0.6 machine hours. The direct material cost per unit of product is estimated at $10.96 and direct labor cost is estimated at $3.84 per unit. The overhead cost per unit is expected to be:

$15.00 (Overhead applied = Plantwide overhead rate x Actual machine-hours Overhead applied = $25.00 per MH x 0.6 machine-hours = $15.00)

Massillon Company manufactures two models (X100 and Z300) of its product. Its departmental overhead rates have been determined as follows: $50.00 per MH in the machining department and $15 per DLH in the assembly department. Each unit of the X100 model requires 15 MH and 5 DLH. Each unit of the Z300 model requires 25 MH and 10 DLH. The company expects to manufacture 1,000 units of its X100 model and 500 units of its Z300 model. The per unit overhead costs assigned to the X100 model and Z300 model, respectively, are:

$825 and $1,400. feedback: Per unit overhead cost of X100 model = ($50 per MH x 15 MH) + ($15 per DLH x 5 DLH) = $750 + $75 = $825 Per unit overhead cost of Z300 model = ($50 per MH x 25 MH) + ($15 per DLH x 10 DLH) = $1,250 + $150 = $1,400

Identify activities and the costs they cause.

Step 1

From an ABC perspective, what causes costs to be incurred?

Activities.

Although both the plantwide and departmental overhead rate methods can be used for internal decision making, only the departmental overhead rate method is acceptable for external reporting.

False feedback: Both the plantwide and department overhead rate methods are acceptable for external reporting since both are in conformity with GAAP.

The plantwide overhead rate method should not be used as a basis for assigning overhead costs to products.

False feedback: In some industries, overhead costs are closely related to a single volume-related measure, such as direct labor. If this is the case, the plantwide overhead rate method would be a simple and logical basis for assigning indirect manufacturing costs to products.

T/F: The departmental overhead rate method is more refined than the plantwide overhead rate method.

True feedback: Many companies have several departments that produce various products and consume overhead resources in substantially different ways. Under such circumstances, the single plantwide overhead rate method can produce cost assignments that fail to accurately reflect the cost to manufacture a specific product. In these cases, use of multiple overhead rates can result in better overhead cost allocations and improve management decisions. As such, the departmental overhead rate method is more refined than the plantwide overhead rate method.

To reduce the total number of activities that must be assigned costs, ____________ activities are grouped into activity cost pools.

homogeneous

Benson, Inc., manufactures a single product. The company's plantwide overhead rate is $25 per machine-hour (MH). Each unit of product requires 0.6 machine hours. The direct material cost per unit of product is estimated at $10.96 and direct labor cost is estimated at $3.84 per unit. The total unit cost of its product is estimated to be:

$29.80 (Overhead applied = Plantwide overhead rate x Actual machine-hours Overhead applied = $25.00 per MH x 0.6 machine-hours = $15.00 Total unit cost = Direct material cost per unit + Direct labor cost per unit + Overhead cost per unit Total unit cost = $10.96 + $3.84 + $15.00 = $29.80)

Assume that the Oregon Ice Cream Company is considering the costs of two of their product lines—ice cream sandwiches and dessert bars. The company identified the following partial list of activities, costs, and activity drivers expected for the next year. How much overhead cost will be assigned to the ice cream sandwich product line using activity-based costing (ABC)? Activity a. Extrusion costs: Expected costs: $637,500 Cost driver: Number of batches made b. Packaging costs: Expected costs $44,000 Cost driver: Number of units made c. Ice Cream Sandwiches: Production Volume 350,000 units, Batches made: 400 batches d. Dessert Bars: Production Volume 200,000 units, Batches made: 350 batches

$368000 Explanation Extrusion activity rate: $637,500/(400 + 350) batches = $850 per batch Packaging activity rate: $44,000/(350,000 + 200,000) units = $0.08 per unit Ice cream sandwich product line allocations: Extrusion: $850 × 400 batches = $340,000 Packaging: $.08 × 350,000 units = $28,000 Total = $368,000

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 (Plantwide overhead rate = Total budgeted (or estimated) overhead cost ÷ Budgeted machine hours Plantwide overhead rate = $25,000 ÷ 5,000 machine hours = $5.00 per machine hour)

Direct labor hours Machining: 16,000, Assembly: 12,000 Direct labor costs Machining: $20,000 Assembly: $15,000 Machine hours Machining: 5,000, Assembly: 1,000 Overhead Machining: $25,000, Assembly: $30,000 Assuming that overhead in the machining department is allocated on the basis of machine hours, and overhead in the assembly department is allocated on the basis of direct labor cost, the departmental overhead rates per unit of the related allocation bases in the Machining and Assembly Departments respectively will be:

$5.00 and 200%. feedback: Machining Department: Departmental overhead rate = Estimated overhead cost of $25,000 ÷ Estimated machine hours of 5,000 MHs = $5.00 per MH Assembly Department: Departmental overhead rate = Estimated overhead cost of $30,000 ÷ Estimated direct labor cost of $15,000 = 200% (or $2.00 of overhead cost per direct labor dollar)

Which of the following statements is true with regard to the departmental overhead rate method?

It is logical to use this method when overhead resources are consumed by various products in substantially different ways throughout multiple departments.

Trace overhead costs to activity cost pools.

Step 2

Compute overhead allocation rates for each activity cost pool.

Step 3

After a(n) _________ rate is computed for each cost pool, this rate is used to allocate overhead costs to products.

activity

The _______ step of ABC is to compute an activity rate for each activity.

third