ACC 406 Chapter 7: Chapter 7 - Activity Based Costing and Management

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amethystgoat54

7 Mar 2012

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Plant-wide and departmental rates based on direct labour hours, machine hours or other volume based measures have been used for decades to assign overhead costs to products and continue to be used successfully by many organizations. However, this approach to costing is equivalent to an averaging approach and may produce distorted or inaccurate costs. Therefore one meal is overstated by and other is understated by . Same way, plant-wide and departmental rates can produce average costs that are either under or overstated product costs. In order for accurate cost information to be produced, it is important that the firm"s cost system accurately reflects the firm"s underlying business or economic reality. Need for a more accurate cost has forced many companies to take a serious look at their costing procedures. At least 2 major factors can impair the ability of unit based plant-wide and departmental rates to assign overhead costs accurately.

Related Questions

Which costing method assumes all products use overhead costs in the same proportions?

	All cost allocation methods
	Plantwide overhead rate method
	Activity-based costing
	Departmental overhead rate method

Which of the following would usually not be used in computing plantwide overhead rates?

	Direct labor dollars
	Number of quality inspections
	Machine hours
	Direct labor hours

With ABC, overhead costs should be traced to which cost object first?

	Departments
	Units of product
	Activities
	Product batches

bluewater-buffalo592

Select a letter A through D that corresponds to the description of that term. Some letters are used more than once.

A.	Uses more than one rate to allocate overhead costs to products.
B.	Uses only volume-based measures such as direct labor hours to allocate overhead costs to products.
C.	Typically uses the most overhead allocation rates.
D.	Focuses on the costs of carrying out activities.

Term
1.		Activity-based costing
2.		Plantwide overhead rate method
3.		Departmental overhead rate method

lilacsheep352

Stewart Marketing Inc. manufactures two products, A andB. Presently, the company uses a single plant-wide factory overheadrate for allocating overhead to products. However, management isconsidering moving to a multiple department rate system forallocating overhead. From the following information, using a singleplant-wide rate, determine the overhead rate per unit for ProductA:

	Overhead	Direct Labor Hours (dlh)	Product
	Overhead	Direct Labor Hours (dlh)	A	B
Painting Dept.	$248,000	10,000 dlh	16 dlh	4 dlh
Finishing Dept.	72,000	10,000	4	16
Totals	$320,000	20,000 dlh	20 dlh	20 dlh
	========	==========	======	======

	Overhead	Direct Labor Hours (dlh)	Product
	Overhead	Direct Labor Hours (dlh)	A	B
Painting Dept.	$248,000	10,000 dlh	16 dlh	4 dlh
Finishing Dept.	72,000	10,000	4	16
Totals	$320,000	20,000 dlh	20 dlh	20 dlh
	========	==========	======	======

The single plantwide factory overhead rate is $52 perdirect labor hour. The company implements activity-based costingusing four different activity bases, including direct labor hours(and three others). What can be said about the direct labor rateunder activity-based costing relative to the single plantwiderate?

The direct labor rate under activity-based costing will beequal to $52 per direct labor hour.

The direct labor rate under activity-based costing cannot becompared meaningfully to the $52 per direct labor hour rate.

The direct labor rate under activity-based costing must be lessthan $52 per direct labor hour.

The direct labor rate under activity-based costing must begreater than $52 per direct labor hour.

The Nite Lite Factory produces two products - smalllamps and desk lamps. It has two separate departments - finishingand production. The overhead budget for the finishing department is$550,000, using 500,000 direct labor hours. The overhead budget forthe production department is $400,000 using 80,000 direct laborhours. If the budget estimates that a desk lamp will require 1hours of finishing and 2 hours of production, how much factoryoverhead will be allocated to each unit of desk lamps using themultiple production department factory overhead rate method with anallocation base of direct labor hours?

The Delph Company produces two products, Blinks andDinks. They are manufactured in two departments, Fabrication andassembly. Data for the products and departments are listedbelow.

Product	Number of units	Labor hrs per unit	Machine hours per unit
Blinks	1,000	4	5
Dinks	2,000	2	8

All of the Machine hours take place in the Fabricationdepartment, which has an estimated overhead of $84,000. All of thelabor hours take place in the Assembly department, which has anestimated total overhead of $72,000.

The Delph Company usesa departmental overheadrates. The fabrication department uses machinehours for an allocation base, and the assembly department useslabor hours. What is the overhead cost per unit forDinks?

ACC 406 Chapter 7: Chapter 7 - Activity Based Costing and Management

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