Exam 4: Activity Based Costing and Analysis

Lemon Yellow Company produces children's clothing that requires two processes, cutting and sewing, to complete. The company is concerned about one product, a hooded jacket, which hasn't been selling as well as it had in past years. Information related to the 20,000 jackets produced annually is shown in the following table: Lemon Yellow's total expected overhead costs and related overhead data are shown below. The company uses departmental overhead rates based on direct labor hours in the Cutting Department and machine hours in the Sewing Department. Assume this jacket currently sells for $10. How much profit does the company make per jacket?

A company produces surgical equipment that goes through threes processes, 1A1, 2B2, and 3C3, before they are complete. Expected costs and activities for the three departments are shown below. All departments have departmental overhead rates based on direct labor hours. Therefore, the overhead rate for each department is $5 per direct labor hour.

A cost pool is a collection of costs that are related to the same or similar activity.

Compute Aztec's departmental overhead rate for the baking department based on direct labor 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, what is the company's plantwide overhead rate?

The final step of activity-based costing assigns overhead costs to pools rather than to products.

The departmental overhead rate method uses the same overhead rate for each production department.

Explain cost flows for the departmental overhead rate method.

A company estimates that overhead costs for the next year will be $3,600,000 for indirect labor, $200,000 for factory utilities, and $21,500 for depreciation on factory machinery. The company uses machine hours as its overhead allocation base. If 764,300 machine hours are planned for this next year, what is the company's plantwide overhead rate?

Time Bender Company makes watches and clocks. The following estimated data are available for the company's next fiscal year: Total direct labor costs: $1,700,000 Total setup costs: $190,000 Determine the setup cost per unit for the watches and the clocks if setup costs are assigned using a plantwide overhead rate based on direct labor hours. (Round to two decimal places.)

A major disadvantage of using a plantwide overhead rate is the extreme difficulty in gathering the needed information.

Products are the first stage cost objects when using a departmental overhead rate method.

What are three advantages of activity-based costing over traditional volume-based allocation methods?

By definition, costs classified as overhead are consumed in basically the same manner regardless of the process involved.

Which of the following statements is true with regard to activity-based costing rates?

The use of departmental overhead rates will generally result in:

Superior Products Manufacturing identified the following data in its two production departments: Compute departmental overhead rates assuming the Assembly rate is based on machine hours and the Finishing rate is based on direct labor hours.

A company has two products: Big and Little. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools: Annual production and sales level of big product is 62,525 units, and the annual production and sales level of little product is 251,900 units. a. Compute the approximate overhead cost per unit of big product under activity-based costing. b. Compute the approximate overhead cost per unit of little product under activity-based costing.

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?

ABC can be used to assign costs to any cost object that is of management interest.