Exam 3: Cost Assignment

Which of the following methods of assigning costs is based on convenience or some assumed linkage, and reduces the overall accuracy of the cost assignments?

Ernest, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost Cost Driver Expected Quantity Setup costs £320,000 Number of setups 4,000 Ordering costs 120,000 Number of orders 20,000 Maintenance 480,000 Machine hours 24,000 Power 40,000 Kilowatt hours 160,000 The following are two of the jobs completed during the year: Job 320 Job 321 Direct materials £8,000 £19,000 Direct labour £6,400 £12,000 Units completed 800 1,600 Direct labour hours 240 500 Number of setups 12 20 Number of orders 20 40 Machine hours 400 600 Kilowatt hours 280 400 The company's normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.) a.Determine the unit cost for each job using direct labour hours to apply overhead. b.Determine the unit cost for each job using the four cost drivers. c.Which method produces the more accurate cost assignment? Why?

Support departments

Refer to Figure 3-3. What is the allocation rate per packing order using activity-based costing?

Rounders Company used the following information when determining the appropriate overhead rates to use in its two production departments: Fabrication Assembly Budgeted overhead £350,000 £500,000 Budgeted activity: Direct labour hours (DLH) 14,000 12,500 Machine hours (M H) 20,000 25,000 Units projected 7,000 4,000 Actual operating results were as follows: Actual overhead cost £355,000 £505,000 Actual activity: Direct labour hours (DLH) 13,500 13,000 Machine hours (M H) 19,000 27,000 Two of the products in the product line were as follows: Product 1 Product 2 Prime costs £900,000 £1,200,000 Activity: Fabrication 5,000 6,000 Assembly 9,000 12,000 Units produced 7,000 4,000 a.Assume that Rounders applies overhead using a plantwide rate based on direct labour hours. Determine the unit cost of Products 1 and 2. b.Assume that Rounders uses direct labour hours to apply overhead in the Fabrication Department and machine hours to apply overhead in the Assembly Department. Determine the unit cost of Products 1 and 2.

Figure 3-1 The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance £50,000 Inspection 75,000 The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct labour hours. The following data have been assembled for use in developing a bid for a proposed job: Direct materials £500 Direct labour £2,000 Machine hours 500 Number of inspections 4 Direct labour hours 800 Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500. -Refer to Figure 3-1. Using direct labour hours to assign overhead, the total cost of the potential job would be

Figure 3-6 Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance £510,000 Materials handling 250,000 Setups 60,000 Inspection 210,000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials £30,000 Direct labour (8,000 hours) £24,000 Number of materials moves 100 Number of inspections 120 Number of setups 24 Number of machine hours 4,000 The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours 60,000 Material moves 20,000 Setups 3,000 Quality inspections 12,000 -Refer to Figure 3-6. If Ray Manufacturing used activity-based cost drivers to assign overhead, the total cost of the proposed job would be

The support departments typically found in manufacturing and nonmanufacturing organizations are as follows: Cafeteria Personnel Maintenance Purchasing Accounting

Which of the following allocation methods fully recognizes services that support departments provide to each other?

An activity-based costing system uses which of the following procedures?

Figure 3-6 Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance £510,000 Materials handling 250,000 Setups 60,000 Inspection 210,000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials £30,000 Direct labour (8,000 hours) £24,000 Number of materials moves 100 Number of inspections 120 Number of setups 24 Number of machine hours 4,000 The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours 60,000 Material moves 20,000 Setups 3,000 Quality inspections 12,000 -Refer to Figure 3-6. If Ray Manufacturing used activity-based cost drivers to assign overhead and the company's bid is full cost plus 10 per cent, the company's bid would be

Staff Company allocates common Building Department costs to producing departments (P1 and P2) based on space occupied, and it allocates common Personnel Department costs based on the number of employees. Space occupancy and employee data are as follows: Building Personnel Dept. P1 Dept. P2 Space occupied 2,000 10,000 120,000 70,000. Employees 6 10 80 50 If Staff Company uses the sequential allocation method and the support department with the highest percentage of interdepartmental services is allocated first, the ratio representing the portion of Personnel Department costs allocated to Department P2 is

Examples of producing departments include all of the following EXCEPT

Fox Company has two support departments (S1 and S2) and two producing departments (P1 and P2). Estimated direct costs and percentages of services used by these departments are as follows: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Used by Department}$ Support Dept. 1 - 10\% 40\% 50\% 2 20\% - 50\% 30\% Direct costs £4,500 £8,000 £10,000 £15,000 a.Prepare a schedule allocating the support department costs to the producing departments using the direct allocation method. b.Prepare a schedule allocating the support department costs to the producing departments using the sequential allocation method.

Figure 3-6 Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance £510,000 Materials handling 250,000 Setups 60,000 Inspection 210,000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials £30,000 Direct labour (8,000 hours) £24,000 Number of materials moves 100 Number of inspections 120 Number of setups 24 Number of machine hours 4,000 The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours 60,000 Material moves 20,000 Setups 3,000 Quality inspections 12,000 -Refer to Figure 3-6. If Ray Manufacturing used activity-based cost drivers to assign overhead, the total amount of overhead allocated to the proposed job would be

Figure 3-5 The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance £120,000 Inspection £200,000 The plant currently applies overhead using direct labour hours and expected capacity of 80,000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job: Direct materials £1,500 Direct labour £5,000 Machine hours 400 Number of inspections 6 Direct labour hours 750 Total expected machine hours for all jobs during the year are 40,000, and the total expected number of inspections is 2,500. -Refer to Figure 3-5. Using activity-based costing and the appropriate cost drivers, the total cost of the potential job would be

Figure 3-1 The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance £50,000 Inspection 75,000 The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct labour hours. The following data have been assembled for use in developing a bid for a proposed job: Direct materials £500 Direct labour £2,000 Machine hours 500 Number of inspections 4 Direct labour hours 800 Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500. -Refer to Figure 3-1. Using activity-based costing and the appropriate activity drivers, the total cost of the potential job would be

Which of the following departments is NOT a support department?

Holbrook, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost Cost Driver Expected Quantity Setup costs £960,000 Number of setups 4,800 Ordering costs 160,000 Number of orders 20,000 Maintenance 640,000 Machine hours 64,000 Power 80,000 Kilowatt hours 200,000 The following are two of the jobs completed during the year: Job 701 Job 702 Frime costs £25,000 £18,000 Units completed 650 500 Direct labour hours 180 220 Number of setups 12 15 Number of orders 16 30 Machine hours 360 300 Kilowatt hours 180 650 The company's normal activity is 40,000 direct labour hours. a.Determine the unit cost for each job using direct labour hours to apply overhead. b.Determine the unit cost for each job using the four cost drivers. (Round amounts to two decimal places.) c.Which method produces the more accurate cost assignment? Why?

Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into four cost pools that use the following activity drivers: Number of Number of Number of Labour Labour Product Orders Setups Setups Transactions Hours 60 20 50 2,000 YY 20 80 70 500 Cost per pool £16,000 £13,000 £2,400 £20,000 a.Compute the allocation rates for each of the activity drivers listed. b.Allocate the overhead costs to Products XX and YY using activity-based costing. c.Compute the overhead rate using labour hours under the traditional functional-based costing system. d.Allocate the overhead costs to Products XX and YY using the traditional functional-based costing system overhead rate calculated in part (c).