Exam 4: Activity Based Costing

Multiple production department factory overhead rates are most useful when production departments are very similar in their manufacturing processes.

Use of a plantwide factory overhead rate distorts product costs when there are differences in the factory overhead rates across different production departments and when products require different ratios of allocation-base usage in each production department.

The Pikes Peak Leather Company manufactures leather handbags and moccasins. The company has been using the factory overhead rate method but has decided to evaluate activity based costing to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices. Calculate the amount of factory overhead to be allocated to each unit using activity based costing.  The factory plans to produce 60,000 handbags and 40,000 moccasins.

The Kaumajet Factory produces two products - table lamps and desk lamps. It has two separate departments - Finishing and Production. The overhead budget for the Finishing Department is $550,000, using 500,000 direct labor hours. The overhead budget for the Production Department is $400,000 using 80,000 direct labor hours. If the budget estimates that a table lamp will require 2 hours of finishing and 1 hours of production, how much factory overhead will the Kaumajet Factory allocate to each unit of table lamp using the multiple production department factory overhead rate method with an allocation base of direct labor hours?

Scoresby Co. uses 6 machine hours and 2 direct labor hours to produce Product X. It uses 8 machine hours and 16 direct labor hours to produce Product Y. Scoresby's Assembly and Finishing departments have factory overhead rates of $240 per machine hour and $160 per direct labor hour, respectively. How much overhead cost will be charged to the two products?

The selection of the factory overhead allocation method is important because the method selected determines the accuracy of the product cost.

A plantwide factory overhead rate assumes that all overhead is directly related to one activity representing the entire plant.

Use of a plantwide factory overhead rate assumes that the activities causing overhead costs are different across different departments and products.

The Klamath Corp. produces two products, saws and drills. Three activities are used in their manufacture. These activities and their associated costs and bases are as follows: Requirements: a) Determine the activity rate for each activity. b) Determine the overhead cost per unit for each product.

Kettle Factory produces two similar products - gloves and mittens.  The total plant budget is $1,050,000 with  600,000 estimated direct labor hours.  It is further estimated that glove production will require 375,000 direct labor hours and mitten production will require 225,000 direct labor hours. (a) Determine the single plant factory overhead rate based on direct labor hours. (b) How much is the factory overhead cost per pair of gloves if each pair requires 2 hours to produce? (c) How much is the factory overhead cost per pair of mittens if each pair takes 1.5 hours to produce? (d) How much total factory overhead will be allocated to glove production if 187,500 pairs are budgeted and 190,000 pairs are actually produced during the period? (e) How much total factory overhead will be allocated to mitten production if 150,000 pairs are budgeted and 140,000 pairs are actually produced during the period?

Everest Co. uses a plantwide factory overhead rate based on direct labor hours. Overhead costs would be overcharged to which of the following departments?

Which of the following is not a reason for banks to use activity-based costing?

If the budgeted factory overhead cost is $460,000, the budgeted direct labor hours is 80,000, and the actual direct labor hours is 6,700 for the month, the factory overhead rate for the month is $68.65 (if the allocation is based on direct labor hours).

Which of the following is not a factory overhead allocation method?

Which of the following is a cost pool used with the activity-based costing method?

Blue Ridge Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plantwide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. The following table presents information about estimated overhead and direct labor hours. Determine the overhead from both production departments allocated to each unit of Product B if Blue Ridge Marketing Inc. uses a multiple department rate system.

Multiple production department factory overhead rates are more accurate than are plantwide factory overhead rates.

Zorn Co. budgeted $600,000 of factory overhead cost for the coming year. Its plantwide allocation base, machine hours, is budgeted at 100,000 hours. Budgeted units to be produced are 200,000 units. Zorn's plantwide factory overhead rate is $6.00 per unit.

When a plantwide factory overhead rate is used, overhead costs are applied to all products by a single rate.

Use of a plantwide factory overhead rate assumes that the activities causing overhead costs are the same across all departments and products.