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Exam 4: Activity-Based Costing and Analysis

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Question 1

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Plantwide overhead rates typically do a better job of matching each department's overhead costs to the products using the department's resources than do departmental overhead rates.

A) True
B) False

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Question 2

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[The following information applies to the questions displayed below.] Malone Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $510,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 15,000 units of Big X and 18,000 units of Little X next year. -Malone's plantwide overhead rate will be $20.99 per direct labor hour next year.

A) True
B) False

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Question 3

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ABC allocates overhead costs to products based on activities rather than direct labor or machine hours.

Match each of the following terms a through j with the appropriate definitions

The premise of ABC is that it takes ________ to make products and provide services.

[The following information applies to the questions displayed below.] Malone Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $510,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 15,000 units of Big X and 18,000 units of Little X next year. -Malone has 33,000 total estimated direct labor hours for next year.

Batch-level costs do not vary with the number of units produced.

A company produces garden benches that go through two departments, department 1A1 and department 2B2, before they are complete. Expected costs and activities for the two departments are shown below. Both departments have departmental overhead rates based on machine hours. Therefore, the overhead rates for department 1A1 and department 2B2 are the same.

When products differ in batch size and complexity, they usually consume different amounts of overhead resources.

Lake Erie Company uses a plantwide overhead rate with machine hours as the allocation base. Next year, 600,000 units are expected to be produced taking 0.75 machine hours each. How much overhead will be assigned to each unit produced given the following estimated amounts?

Batch-level costs vary with the number of units produced.

A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools: $\begin{array} { l c c c } & & { \text { Budgeted Activity } } \\\text { Activity Cost Pool } & \text { Budgeted Cost } & \text { Product Al } & \text { Product B2 } \\\text { Activity 1 } & \$ 48,000 & 1,200 & 4,800 \\\text { Activity 2 } & \$ 63,000 & 2,240 & 4,760 \\\text { Activity 3 } & \$ 80,000 & 7,200 & 800\end{array}$ Annual production and sales level of Product A1 is 8,480 units, and the annual production and sales level of Product B2 is 22,310 units. What is the approximate overhead cost per unit of Product A1 under activity-based costing?

A company estimates that costs for the next year will be $500,000 for indirect labor, $50,000 for factory utilities, and $1,000,000 for the CEO's salary. The company uses machine hours as its overhead allocation base. If 25,000 machine hours are planned for this next year, then a product requiring 10 machine hours will be assigned $220 in overhead.

All of the following are examples of facility sustaining costs except:

The ________ overhead rate is calculated by dividing total budgeted overhead cost by a chosen allocation base, such as direct labor hours.

Blast Rocket Company manufactures candy-coated popcorn treats that go through two operations, popping and baking, before they are complete. Expected costs and activities for the two departments are shown in the following table: $\begin{array} { | l | l | l | } \hline & \text { Popping } & \text { Baking } \\\hline \text { Direct labor hours } & 238,000 \mathrm { DLH } & 50,000 \mathrm { DLH } \\\hline \text { Machine hours } & 25,000 \mathrm { MH } & 141,500 \mathrm { MH } \\\hline \text { Overhead costs } & \$ 357,000 & \$ 452,800 \\\hline\end{array}$ a. Compute a departmental overhead rate for the popping department based on direct labor hours. b. Compute a departmental overhead rate for the baking department based on machine hours.

K Company estimates that overhead costs for the next year will be $2,900,000 for indirect labor and $800,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 80,000 direct labor hours are planned for this next year, how much overhead would be assigned to a product requiring 4 direct labor hours?

What are the major advantages of using a plantwide overhead rate?

A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools: $\begin{array} { l c c c } & & { \text { Budgeted Activity } } \\\text { Activity Cost Pool } & \text { Budgeted Cost } & \text { Product Al } & \text { Product B2 } \\\text { Activity 1 } & \$ 48,000 & 1,200 & 4,800 \\\text { Activity 2 } & \$ 63,000 & 2,240 & 4,760 \\\text { Activity 3 } & \$ 80,000 & 7,200 & 800\end{array}$ Annual production and sales level of Product A1 is 8,480 units, and the annual production and sales level of Product B2 is 22,310 units. What is the approximate overhead cost per unit of Product B2 under activity-based costing?

The departmental overhead rate method allows each department to have its own overhead rate and its own allocation base.