Exam 3: How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs

Both manufacturing and service organizations use activity-based costing.

Which of the following items is a facility-level activity?

Exhibit 3-3 Metro Inc.has two production departments (Lamination and Molding)and three service departments (Human Resources,Technology Support,and Purchasing).Service department costs are allocated to production departments using the direct method.The $200,000 costs of Human Resources are allocated based on the number of employees in each production department.The $400,000 costs of Technology Support are allocated based on hours of technology support used by each production department.The $120,000 of Purchasing is allocated on the pounds of raw materials purchased for each production department.Information for each production department is as follows: -Refer to Exhibit 3-3.Using the direct method of allocating service department costs to production departments,how much of the Human Resource service department costs should be allocated to the Molding Department?

Telecom Company produces a cell phone that sells for $150,and a smart phone that sells for $350.Last year,total overhead costs of $550,000 were allocated based on direct labor hours.A total of 12,000 direct labor hours were required last year to build 6,000 cell phones (2 hours per unit),and 10,000 direct labor hours were required to build 2,000 smart phones (5 hours per unit).Total direct labor and direct materials costs for last year were: Management of Telecom Company would like to use activity-based costing to allocate overhead rather than using one plantwide rate based on direct labor hours.The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs.

Overhead activities that are required to sustain facility operations are called unit-level activities.

Indirect manufacturing costs are easily traceable to products.

Activity-based costing breaks total estimated overhead costs out into different departments to establish an overhead rate for each department.

Appraisal costs are the same as detection costs.

Exhibit 3-3 Metro Inc.has two production departments (Lamination and Molding)and three service departments (Human Resources,Technology Support,and Purchasing).Service department costs are allocated to production departments using the direct method.The $200,000 costs of Human Resources are allocated based on the number of employees in each production department.The $400,000 costs of Technology Support are allocated based on hours of technology support used by each production department.The $120,000 of Purchasing is allocated on the pounds of raw materials purchased for each production department.Information for each production department is as follows: -Refer to Exhibit 3-3.Using the direct method of allocating service department costs to production departments,how much of the Technology Support service department costs should be allocated to the Molding Department?

Valor company is planning to implement an activity-based costing (ABC)system to apply overhead costs to products.Three activities were identified and rates were calculated for each activity. Assume 600 purchase requisitions were processed,1,200 production setups were performed,and 300 products were inspected for the year.Which of the following journal entries would be made by Valor to record the application of overhead?

Exhibit 3-1 Hydrate Inc.makes two types of sports drinks and is implementing an activity-based costing system.Previously,all overhead had been applied on the basis of machine hours.The company produces 22,500 units of Sports Light and 42,284 units of Thirst Quench.Additional data is as follows: -Refer to Exhibit 3-1.What is the overhead cost per unit for Thirst Quench using ABC?