ACCT101 - Ch. 4

Which best describes the flow of overhead costs in an activity-based costing system? Overhead costs → machine hours → products Overhead costs → products Overhead costs → activity cost pools → cost drivers → products Overhead costs → direct labor cost or hours → products

Overhead costs → activity cost pools → cost drivers → products

Which of the following is not typical of traditional costing systems? Use of direct labor hours or direct labor cost to assign overhead. Assumption of correlation between direct labor and incurrence of overhead cost. Use of multiple cost drivers to allocate overhead. Use of a single predetermined overhead rate.

Use of multiple cost drivers to allocate overhead.

Often the most difficult part of computing accurate unit costs is determining the proper amount of _________ to assign to each product, service, or job. direct labor direct materials and direct labor overhead direct materials

overhead

An activity that has a direct cause-effect relationship with the resources consumed is a(n) overhead rate. product activity. cost driver. cost pool.

cost driver.

Activity Based Costing

allocation of overhead to specific jobs based on their percentage of activities (multiple bases)

To assign overhead costs to an individual product, the activity-based overhead rate is multiplied by the number of cost drivers used per product. the number of products produced during the period. the number of direct labor hours used during the period. the number of employees who participate in manufacturing the product.

the number of cost drivers used per product.

(1) Traditional product costing system:

(1) Traditional product costing system:Quality-control overhead costs assigned in June to the low-calorie breakfast line are $12,580 ($74,000 x 0.17).

Tot. assigned OH

(No. of setups x OH rate/setup) + (No. of MH x OH rate/MH) + (No. of orders x OH rate/order)

2) Bella, Inc. manufactures two kinds of bagstotes and satchels. The company allocates manufacturing overhead using a single plantwide rate with direct labor cost as the allocation base. Estimated overhead costs for the year are $25,750. Additional estimated information is givenbelow. Totes Satchels Direct materials cost per unit $33 $44 Direct labor cost per unit $52 $60 Number of units 520 370 Calculate the predetermined overhead allocation rate. (Round your answer to two decimal places. A) 52.29% B) 1.49% C) 95.23% D) 86.21%

A) 52.29%

5) An activity-based costing system is developed in four steps: 5) Compute the predetermined overhead allocation rate for each activity. Identify activities and estimate their total indirect costs. Identify the allocation base for each activity and estimate the total quantity of each allocation base. d. Allocate indirect costs to the cost object. Which of the following is the correct order for performing these steps? Totes Satchels Direct materials cost per unit $33 $44 Direct labor cost per unit $52 $60 Number of units 520 370 A) b, c, a, d B) b, a, c, d C) a, b, c, d D) c, a, b, d

A) b, c, a, d

Traditional Costing System

Accounting systems that do not accumulate or report costs of individual activities or processes. DM (40) DL (12) = MOH (52)

Activity-based costing system:

Activity Cost Pools: Cost Drivers Used X Activity-Based Overhead Rates = Overhead Cost Assigned

ABC MOH RATE

Estimated Overhead per Activity/Expected Use of Cost Drivers per Activity = abc moh rate

By what amount does the traditional product costing system undercost or overcost the low-calorie breakfast line?

As compared to ABC, the traditional costing system undercosts the quality-control overhead cost assigned to the low-calorie breakfast line by $1,928 ($14,508 - $12,580) in the month of June. That is a 13.3% understatement.[($14,508 - $12,580 = $1,928); ($1,928 ÷ $14,508 = 13.3%)] [(Tot. assigned OH costs under ABC - Tot. assigned OH costs under traditional = Understated diff.); (Unstated diff. ÷ Tot. assigned OH costs under ABC = Understated % diff.)]

4) A radial tire manufacturer produces products in two departmentsDivisions A and B. The company uses separate predetermined overhead allocation rates for each department to allocate its overhead. Divisions A and B have estimated manufacturing overhead costs of $160,000 and$360,000, respectively. Division A uses machine hours as the allocation base, and Division B uses direct labor hours as the allocation base. The total estimated machine hours were 31,000, and direct labor hours were 22,000 for the year. Calculate the departmental predetermined overhead allocation rates. (Round your answer to the nearest cent.) A) Division A$7.27, Division B$11.61 B) Division A$5.16, Division B$16.36 C) Division A$16.36, Division B$5.16 D) Division A$11.61, Division B$7.27

B) Division A$5.16, Division B$16.36

9) Which of the following decisions will most likely involve the use of activity-based management? A) decisions related to the expansion operations in a particular geographic location B) decisions related to the pricing of a product C) decisions related to the financing of an investment using equity or debt D) decisions related to the payment of dividends

B) decisions related to the pricing of a product

Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true?(1) Direct labor constitutes a significant part of total product cost.(2) A high correlation exists between direct labor and changes in the amount of overhead costs. (1) only (2) only Either (1) or (2) Both (1) and (2)

Both (1) and (2)

3) Treasurers, Inc., a manufacturer of gift articles, uses a single plantwide rate to allocate indirect costs with machine hours as the allocation base. Estimated overhead costs for the year are$6,000,000. Estimated machine hours are 29,000. During the year, the actual machine hours usedwere 50,000. Calculate the predetermined overhead allocation rate. (Round your answer to the nearest dollar.) A) $120 B) $63 C) $207 D) $88

C) $207

Flannery Company, a manufacturer of small appliances, had the following activities, allocated 8) costs, and allocation bases:Activities Allocated Costs Allocation Base Account inquiry (hours) $79,000 3000 hours Account billing (lines) $31,000 17,000 lines Account verification (accounts) $12,000 25,000 accounts Correspondence (letters) $11,000 1400 letters Activities Northeast Office Midwest Office Account inquiry (hours) 120 hours 300 hours Account billing (lines) 10,000 lines 7000 lines Account verification (accounts) 1500 accounts 700 accounts Correspondence (letters) 60 letters 110 letters A) $0.48 B) $3.67 C) $7.86 D) $22.14

C) $7.86

1) Which of the following statements is true? A) Manufacturing overhead costs are accumulated in cost pools and then assigned to products. B) Indirect costs must be allocated based on a single plant wide rate. C) Managers cannot wait until the end of the accounting period for product cost information. D) Managers can choose to wait until the end of the accounting period to allocate manufacturing overhead costs.

C) Managers cannot wait until the end of the accounting period for product cost information.

Gizmo Company, a manufacturer of small appliances, had the following activities, allocated 7) costs, and allocation bases: The above activities are carried out at two of its regional offices. What is the cost per hour for the account inquiry activity? (Round your answer to the nearest cent.) Activities Allocated Costs Allocation Base Account inquiry (hours) $68,000 2600 hours Account billing (lines) $34,000 17,000 lines Account verification (accounts) $18,000 20,000 accounts Correspondence (letters) $10,000 1400 letters Activities Northeast Office Midwest Office Account inquiry (hours) 100 hours 250 hours Account billing (lines) 16,000 lines 8000 lines Account verification (accounts) 1900 accounts 700 accounts Correspondence (letters) 50 letters 140 letters A) $2.00 B) $7.14 C) $0.90 D) $26.15

D) $26.15

10) Bella, Inc. manufactures two kinds of bagstotes and satchels. The company allocates 10) manufacturing overhead using a single plantwide rate with direct labor cost as the allocation base. Estimated overhead costs for the year are $25,000. Additional estimated information is givenbelow. Calculate the predetermined overhead allocation rate. (Round your answer to two decimal places.) Totes Satchels Direct materials cost per unit $31 $41 Direct labor cost per unit $54 $65 Number of units 520 360 A) 93.60% B) 89.03% C) 1.54% D) 48.56%

D) 48.56%

6) Which of the following is the most appropriate cost driver for allocating the cost of warranty services? A) number of materials purchased B) number of machine hours C) number of employees D) number of service calls

D) number of service calls

Which of the following is not a reason in support of using activity-based costing? Activity-based costing leads to more cost pools. Activity-based costing leads to better management decisions. Activity-based costing leads to enhanced control over overhead costs. Employee turnover will decrease as a result of using activity-based costing.

Employee turnover will decrease as a result of using activity-based costing.

Cost allocated

Manufactured Estimated Cost x Activity OH rates

Concord Company's overhead rate for machine setups is $113 per setup. A total of 103 setups are estimated for the period. At year-end, it was determined that Products A and B have 59 and 41 setups, respectively. How much is the overhead cost assigned to each product? Product A $6667, Product B $4633 Product A $11300, Product B $4223 Product A $6077, Product B $6077 Not enough information to determine the answer

Product A $6667, Product B $4633 The overhead cost assigned to each product is the rate times the number of setups. The overhead assigned to product A is $113 x 59 setups, or $6667 and the overhead assigned to product B is $113 x 41 setups, or $4633.

Compute overhead cost per unit

Tot. assigned OH ÷ Tot. units produced = OH/unit

In traditional costing systems, overhead is generally applied based on machine hours. direct labor. direct material dollars. units of production.

direct labor.

The costs that are easiest to trace directly to products are direct materials and direct labor. direct labor and overhead. direct materials and overhead. none of the above; all three costs are equally easy to trace to the product

direct materials and direct labor.

During July, the Tucker family placed 13 orders consisting of 22 DVDs. Tucker required 5 minutes of tech support. Customers pay $7 per month to rent unlimited DVDs. Using ABC, how much overhead is applied to the Tucker family account for order taking costs? $1.30 $2.20 $3.50 $5.70

the rate per activity is calculated for order taking, and then multiplied by the actual number of orders incurred by Tucker.Order taking: $20010/200100 orders = $0.10 per orderApplied to Tucker: $0.10 × 13 = $1.30

COMPARING UNIT COSTS

traditional > abc is overstated = too high selling price = marking down understated ABC method is more accurate even tho its an estimate

Activity levels

•1) Unit-level activities •2) Batch-level activities •3) Product-level activities •4) Facility-level activities