Smartbook Ch 17

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

Activity cost pools are:

group of costs related to the same activity

Under the plantwide overhead rate method, total budgeted overhead costs are divided by the chosen allocation base to determine the

one overhead cost rate

Using a single overhead rate to apply overhead to products is called the

plantwide overhead rate method.

Identify the three steps in activity-based costing Rank these in the correct order.

1. Identify activities and assign budgeted costs to activity cost pools. 2. Compute an overhead activity rate for each activity cost pool. 3. Allocate overhead costs to cost objects (products).

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

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

Activities causing overhead include all of the following:

batch-level unit-level facility-level

Disadvantages of using activity-based costing includes all of the following:

cost to implement. product cost can be distorted.

All of the following are types of activities which cause overhead except:

customer-level

The first step in applying activity-based costing is

identifying the activities.

If a company uses activity-based costing, the most appropriate cost driver for the production department would be the:

number of direct labor hours

Each of the following are types of _______ allocation methods: plantwide rate method, departmental overhead rate method and activity-based costing method.

overhead

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.

An activity which focuses on product lines and are not affected by number of units is a

product-level activity

When using activity-based costing, it is very important that the activities in each cost pool are

similar

The plantwide overhead rate method is most appropriate for companies which have

single product

The cost object of the cost assignment under the plantwide overhead rate method is the

unit of product

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.

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.

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 or 1010000

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

__________ activities is the first step in applying activity-based costing.

Identifying

If a company uses activity-based costing, the most appropriate cost driver for the production department would be the:

Number of direct labor hours

In the _______ (third,fourth) stage of activity-based costing, overhead allocation rate is determined for each activity.

Third

True or false: The cost object of the plantwide overhead rate method is the unit of product.

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 is allocated to cost objects in the last step.

True Reason: In the step 1, overhead costs are assigned to department cost pools. In step 2, an allocation base is selected and computed and in step 3, the overhead rates are allocated to the 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 Reason: This is an advantage of the departmental method over the plantwide method as the plantwide method uses a single rate for all products.

________ activities are performed on each product unit.

Unit

The overhead rate method which uses a different overhead rate for each department is the

departmental method

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

Select all answers which apply. The plantwide overhead rate can be based on:

direct labor hours machine hours

_______ level activities are focused on the whole facility and are not caused by units.

facility

The main advantage of the plantwide overhead rate method is:

it is easy to implement

The plantwide overhead rate can be based on:

machine hours direct labor hours

Advantages of the activity-based costing includes:

more effective overhead cost control accurate assignment of costs to products better production and pricing decisions

Match the activity to the most appropriate cost driver.

production -> direct labor hours setup -> Number of setups factory services -> square feet design -> Number of design changes

The plantwide overhead rate method can be based on each of the following except

supervisor hours

The departmental overhead rate method allows individual departments to have

their own overhead rate and allocation base.

Landen Company uses a single plantwide overhead rate based on direct labor hours. Total budgeted overhead costs are $200,000. Total budgeted direct materials are $50,000 and total budgeted direct labor hours are 80,000. What is the plantwide overhead rate per direct labor hour?

$2.50 Reason: $200,000/80,000=$2.50 per direct labor hour.

A cost ______ is a factor that causes the cost of an activity to go up or down.

Driver

The plantwide and departmental overhead rate methods are based on readily available information such as direct ________ hours or _________ hours.

Labor, machine

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

A cost driver is

a factor that causes activity to go up or down.

In activity-based costing, costs are first traced to ______ , activity rates are computed, and then allocated to ______.

activities; cost objects

The basic principle of activity-based costing is that a(n) _________ is what causes overhead cost to be incurred.

activity

The basis of the activity-based costing method is a(n)

activity

ABC can be used by service providers who usually classify costs by

activity level

Activity-based cost systems allocate costs by focusing on

activity or activities

An activity cost _______ is a a group of costs that are related to the same activity.

Pool

A disadvantage of using activity-based costing is that

collecting and analyzing cost data is expensive

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.

In order for a service provider to use activity-based costing, they should classify costs by

Activity level

A _______ (unit, batch, product, facility) level activity are those that are performed on each group of units.

Batch

The _________ overhead rate method uses a different overhead rate per production department.

Departmental

In the _________ (first/second) stage of activity-based costing the activities and overhead costs are identified.

First

One of the characteristics of activity-based costing is that it allows _______ (more, less) effective control over costs.

More

A batch level activity will vary with the

Number of batches

The third step in activity-based costing is to

allocate costs to cost objects.

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.

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.

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.

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.

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. The selling expenses are not part of the overhead for the factory.

Which of the following are a type of overhead allocation method?

activity-based costing method plantwide overhead rate method departmental overhead rate method

The departmental overhead rate method uses a three-step process to allocate costs objects. List these steps in the correct order

1. Assign budgeted overhead cost to department cost pools. 2 Select an allocation base and compute an overhead allocation rate for each department. 3 Allocate overhead costs to cost objects.