Quiz 7: Chapter 9

Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information: Activity Cost Driver Amount M XY Production Setups # of Setups $90,000 20 30 Material Handling # of Parts $54,000 42 28 Packaging Costs # of Units $296,000 120K 80K $440,000 What is the total overhead allocated to Product M using the current system?

$440,000/200,000=$2.20 per unit; $2.20(120,000)=$264,000

If a company manufactures diverse products using different sets of resources in a plant, it is best to use a plant wide allocation rate.

False. Diverse products with different sets of resources need a more refined allocation rate than that used plant wide, where allocations are roughly the same.

If a company has identified three major activities as setting up, handling material, and assembling, possible cost drivers would most likely be set-up hours, production runs, and number of shipments respectively.

False. It is true that set-up hours could be a cost driver for the set-up activity and production runs could be a cost driver for the material handling activity. However, the activity of assembling is not driven by the number of shipments. More likely, assembly would be associated with machine hours or labor hours.

When applying activity based costing, the first step would be to compute the cost driver rates.

False. When applying activity based costing, the first step is to identify the activities. Computing the cost driver rate is the third step in the application of activity-based-costing.

Activity-based costing is so beneficial because it provides more information about product costs but requires less record keeping.

False. While ABC has the benefit of providing more information about product costs, it also requires more record keeping.

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $8 per direct labor hour. Loren is the department manager of the Makeup Department which produces Products - Concealer (C) and Glow Cream (GC). Jennifer is the department manager of the Hair Care Department which manufactures Product - Shampoo (S). The product costs (per case of 24 bottles) and other information are as follows: Direct Materials: C: $90.00 GC: $78.00 S: $50.00 Direct Labor: C: $46.00 GC: $33.00 S: $8.00 Overhead: C: $26.00 GC: $21.00 S: $16.00 Total: C: $162.00 GC: $132.00 S: $74.00 Machine Hours C: 4 GC: 3 S: 4 Number of Cases (per year) C: 200 GC: 400 S: 500 Based on this information, if Flawless changes its allocation basis to machine hours, what is the overhead rate per machine hour?

Total Overhead=$26.00(200)+$21.00(400)+$16.00(500)=$21,600 Total Machine Hours=4(200)+3(400)+4(500)=4,000 Overhead Rate=$21,600/4,000=$5.40/MH

Using the department allocation method, a company established a separate overhead allocation rate for each department.

True. A separate overhead allocation rate is established for each department using a department allocation method.

The single-stage cost allocation system uses a plant wide rate because the cost pool is the entire plant.

True. In a plant wide allocation method, the cost pool is the entire plant.

In general, traditional costing methods allocate less cost to low-volume products and more costs to high-volume products than activity-based-costing (ABC)?

True. Low volume products get less cost under traditional costing since they use less of the volume cost drivers.

The basic approach in product costing is to allocate costs in the cost pools to the individual cost objects, which are the products or services of interest.

True. The basic approach in product cost is to allocate costs in the cost pools to individual cost objects that are the key to products/services.

The department cost allocation method provides more accurate product costs information for managerial decision-making than the plant wide cost allocation method.

True. The information is more accurate because some of the variates in the product can be captured.

Activity-based-costing (ABC) provides more detailed measures of costs than do plant wide or department allocation methods.

True. This is due to ABC using more causal relationships that are not limited to the production floor.

Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information: Activity Cost Driver Amount M XY Production Setups # of Setups $73,000 12 28 Material Handling # of Parts $42,000 72 18 Packaging Costs # of Units $153,750 75K 50K $268,750 What is the total overhead per unit allocated to Product M using activity-based-costing(ABC)?

[($73,000/40)x12]+[($42,000/90)x72]+[($153,750/125,000)x75,000]=$147,750 $147,750/75,000=$1.97