Unit 4 - Activity-Based Costing (ABC) Module 8 - ABC - Overhead Allocation

The cost accountant has gathered the overhead costs associated with the following activities during the past year: Purchasing materials: $1,000,000 Setting up the machines: $2,000,000 Running the machines: $2,000,000 Inspecting final production: $5,000,000 The cost accountant has also identified the cost driver and the number of cost driver activities for each of the above overhead costs over the past year as follows: Number of materials requisitions: 10,000 Setting up the machines: 2,000 set ups Running the machines: 10,000 hours Inspecting final production: 20,000 hours The cost accountant has decided to apply the activity pool concept to allocate overhead costs to each product being produced by the company during the past year. Product B required 750 inspection hours to inspect the final production for this product during the past year. How much of the inspecting final production's overhead costs should be allocated to Product B?

$187,500

The cost accountant has gathered the overhead costs associated with the following activities during the past year: Purchasing materials: $2,000,000 Setting up the machines: $4,000,000 Running the machines: $3,000,000 Inspecting final production: $10,000,000 The cost accountant has also identified the cost driver and the number of cost driver activities for each of the above overhead costs over the past year as follows: Number of materials requisitions: 10,000 Setting up the machines: 2,000 setups Running the machines: 10,000 hours Inspecting final production: 20,000 hours The cost accountant has decided to apply the activity pool concept to allocate overhead costs to each product being produced by the company during the past year. Which of the following would be the correct amount for the per set up cost of the setting up the machines' overhead cost activity pool to a company product?

$2,000

The cost accountant has gathered the overhead costs associated with the following activities during the past year: Purchasing materials: $2,000,000 Setting up the machines: $4,000,000 Running the machines: $3,000,000 Inspecting final production: $10,000,000 The cost accountant has also identified the cost driver and the number of cost driver activities for each of the above overhead costs over the past year as follows: Number of materials requisitions: 10,000 Setting up the machines: 2,000 setups Running the machines: 10,000 hours Inspecting final production: 20,000 hours The cost accountant has decided to apply the activity pool concept to allocate overhead costs to each product being produced by the company during the past year. Which of the following would be the correct amount for the per requisition overhead allocation of the purchasing materials overhead cost activity pool to a company product?

$200

Here are data for Alliah Company reflecting the activity of all Alliah's operating divisions: Cost Driver: Units # of units of events: 100k Cost Pool: $300k Activity Rate: $3 per unit Cost Driver: Batches # of units of events: 100 Cost Pool: $700k Activity Rate: $7k per batch Cost Driver: Product Lines # of units of events: 10 Cost Pool: $500k Activity Rate: $50k per line Cost Driver: Facility Support # of units of events: 0 Cost Pool: $600k Activity Rate: 0 Division A has 20,000 units, 10 batches, and 2 product lines. How much overhead cost should be allocated to Division A?

$230k

The cost accountant has gathered the overhead costs associated with the following activities during the past year: Purchasing materials: $2,000,000 Setting up the machines: $4,000,000 Running the machines: $3,000,000 Inspecting final production: $10,000,000 The cost accountant has also identified the cost driver and the number of cost driver activities for each of the above overhead costs over the past year as follows: Number of materials requisitions: 10,000 Setting up the machines: 2,000 setups Running the machines: 10,000 hours Inspecting final production: 20,000 hours The cost accountant has decided to apply the activity pool concept to allocate overhead costs to each product being produced by the company during the past year. Which would be the correct amount for the per hour inspection cost for allocating the final production cost activity pool to a company product?

$500

The cost accountant has gathered the overhead costs associated with the following activities during the past year: Purchasing materials: $1,000,000 Setting up the machines: $2,000,000 Running the machines: $2,000,000 Inspecting final production: $5,000,000 The cost accountant has also identified the cost driver and the number of cost driver activities for each of the above overhead costs over the past year as follows: Number of materials requisitions: 10,000 Setting up the machines: 2,000 set ups Running the machines: 10,000 hours Inspecting final production: 20,000 hours The cost accountant has decided to apply the activity pool concept to allocate overhead costs to each product being produced by the company during the past year. If Product A requires 500 material requisitions during the year, how much of the purchasing material's overhead costs should be allocated to Product A?

$50k

Here are data for Endothon Company, reflecting the activity of all Endothon's operating divisions: Cost Driver: Units # of units of events: 100k Cost Pool: $500k Activity Rate: $5 per unit Cost Driver: Batches # of units of events: 1k Cost Pool: $700k Activity Rate: $700 per batch Cost Driver: Product Lines # of units of events: 10 Cost Pool: $300k Activity Rate: $30k per line Cost Driver: Facility Support # of units of events: 0 Cost Pool: $600k Activity Rate: 0 Division C has 60,000 units, 500 batches, and 1 product line. How much overhead cost should be allocated to Division C?

$680k

The cost accountant has gathered the overhead costs associated with the following activities during the past year: Purchasing materials: $1,000,000 Setting up the machines: $2,000,000 Running the machines: $2,000,000 Inspecting final production: $5,000,000 The cost accountant has also identified the cost driver and the number of cost driver activities for each of the above overhead costs over the past year as follows: Number of materials requisitions: 10,000 Setting up the machines: 2,000 set ups Running the machines: 10,000 hours Inspecting final production: 20,000 hours The cost accountant has decided to apply the activity pool concept to allocate overhead costs to each product being produced by the company during the past year. Product Z required 400 hours to run the machines for this product during the past year. How much of the running the machines' overhead costs should be allocated to Product Z?

$80k

the steps in implementing and using and ABC system

1) identify overhead cost activities 2) analyze individual overhead costs in terms of those cost activities 3) identify measurable cost drivers 4) assign overhead 5) use the ABC data to make decisions

A company has the following three manufacturing overhead cost drivers and cost pools: Cost Driver: Design Changes Level of Activity: 100 per year Overhead Cost: $5,000 Cost Driver: Machine Set Up Level of Activity: 2000 per year Overhead Cost: $18,000 Cost Driver: Electricity Usage Level of Activity: 12000 kilowatt hrs per year Overhead Cost: $36,000 The company started and completed work on 25 different jobs during the year. One of these jobs was Job 781. Job 781 required 8 design changes, 20 machine setups, and 700 kilowatt hours of electricity. How much manufacturing overhead should be allocated to Job 781 if the company uses ABC?

2,680

Which is the definition of activity-based costing (ABC)?

A costing method that assigns overhead and indirect costs to related products and services in a less arbitrarily way than traditional costing systems

Cost objects

A product or division for which costs are accumulated and tracker

Which is an advantage of using ABC overhead costing over traditional overhead costing?

ABC allocates manufacturing overhead more accurately to products and processes that use the various activities

Activity rate

An overhead rate in ABC, that allocates overhead costs in cost pools to operations based on identified cost drivers

In an ice cream production setting, how does the management accountant determine how much of the factory machine cleaners' total wages should be assigned to the "changing ice cream batches" cost pool?

Analyze what fraction of the machine cleaners' time is typically taken up in activities associated with changing ice cream batches

What does identifying the overhead costs associated with a particular production cost pool require?

Analyzing how indirect production personnel involved in a production process spend their time during the workday

The cost of special machine maintenance, which is necessary because of the frequent starting and stopping of the machines, is an example of which type of ABC support activity?

Batch activity

What is an important point for companies to remember when deciding whether to implement an ABC overhead allocation system?

Companies that understand their costs have an advantage over their competitors that do not understand their costs

What is the collection of overhead costs associated with a specific overhead cost activity called?

Cost pool

How is an ABC cost driver activity rate computed?

Cost pool divided by the number of cost driver events

What is the first step for a company in implementing an ABC overhead allocation system?

Determine what activities are causing the miscellaneous costs associated with production

Sophia Company has two divisions. In the most recent year, total manufacturing overhead was $1,000,000. Sophia has prepared an ABC analysis of these overhead costs below: How much of the $1,000,000 in total overhead cost should be assigned to each of the two divisions? Unit-Level Overhead: 200,000 Division 1: 80k units Division 2: 20k units Batch-Level Overhead: 300,000 Division 1: 60 batches Division 2: 90 batches Product-Level Overhead: 35,000 Division 1: 5 lines Division 2: 20 lines

Division 1: 380k Division 2: 620k

The depreciation of the factory building and the security to protect the facility are examples of which type of ABC support activity?

Facility activity

Which category of overhead includes factory building depreciation, factory insurance, and factory security costs?

Facility support

The cost of preparing documents to order ingredients from various suppliers is an example of which type of ABC support activity?

Product line activity

What production-related cost driver is typically used for facility support costs?

Production-related cost drivers are not used for facility support costs

A company has a warehouse supervisor whose annual costs to the company are $40,000. The warehouse is used to receive and store packaged goods in boxes. Once a customer's order is received, the boxes are removed and shipped. The company is trying to determine what the best way is to allocate the warehouse supervisor's annual costs to each customer order that is shipped during the year. What is the appropriate cost driver to allocate the warehouse supervisor's annual costs to each customer order?

The number of boxes shipped to customers throughout the year

Product-line activities

Those overhead activities that are associated with the capability to produce different types of products Examples include engineering product design, storage in special warehouses, managing by a special supervisor of all activities associated with a particular line, ordering, purchasing, and receiving materials unique to a particular line

Batch-level activities

Those overhead activities that are performed each time a new production batch is started or ended Examples include inspections, machine setup, movement of and accounting for materials

Unit-level activities

Those overhead activities that are performed each time a unit is produced Examples include machine maintenance, machine depreciation, electricity and other energy costs

Facility support activities

Those overhead activities that must be in place before any of the other production activities can take place Examples include property tax, factory insurance, security, landscaping, general accounting, and general factory admin

Cost pool

Total costs being generated by a specific overhead cost activity

The cost of electricity to operate the machines in a factory is an example of which type of ABC support activity?

Unit activity

Cost driver

a numerical measure that reflects how much effort has gone into an activity, these quantify the amount of overhead activity associated with different aspects of production and are used in assigning overhead costs in an ABC system

The effort required to design and implement an ABC system pays for itself if

the company can use the improved cost information to make better decisions

In an ABC system facility support overhead costs are

treated as common costs that are not assigned to any specific product, division, or product line