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

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 total overhead cost applied to Thirst Quench when all overhead is applied based on machine hours?

Companies with one product that requires very little variation in production may not benefit from an ABC system as much as companies with multiple products and complex production processes.

An advantage of using activity-based costing is that it provides detailed information related to production activities.

Which of the following would be the best allocation base for a new product design?

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: Direct materials \ 270,000 \ 160,000 Direct labor 300,000 200,000 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. (1) Calculate the direct materials cost per unit and direct labor cost per unit for each product. (2) a. Using the plantwide allocation method, calculate the predetermined overhead rate and determine the overhead cost per unit for the cell phone and smart phone products. b. What is the product cost per unit for the cell phone and smart phone products? (3) a. Using the activity-based costing allocation method, calculate the predetermined overhead rate for each activity. b. Using the activity-based costing allocation method, allocate overhead to each product. Determine the overhead cost per unit c. What is the product cost per unit for the cell phone and smart phone products? (4) Calculate the per unit profit for each product using the plantwide approach and the activity-based costing approach. Comment on the difference in the results between the two approaches

Companies that use the least number of cost pools possible tend to have the most accurate overhead allocation process.

One important reason that managers allocate overhead costs to products is to promote the efficient use of resources.

Companies who want to identify and eliminate non-value-added activities may implement:

Which of the following would most likely be a non-value-added activity?

Whitney Company has two production departments (P1 and P2)and three service departments (S1,S2,and S3).Service department costs are allocated to production departments using the direct method.The $300,000 costs of department S1 are allocated based on the number of employees in each production department.The $400,000 costs of department S2 are allocated based on the square footage of space occupied by each production department.The $225,000 costs of department S3 are allocated based on hours of technology support used by each production department.Information for each production department is as follows: Number of Square Feet Technology Employees Occupied Support Hours P1 25 4,000 12,000 P2 Total a. Calculate the service department costs allocated to each production department. b. In general, do U.S. Generally Accepted Accounting Principles allow for the allocation of service department costs to production departments for the purpose of valuing inventory?

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: Number of Technology Pounds of Employees Support Hours Raw Materials Lamination 40 600 30,000 Molding Total -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 Lamination Department?

Activity-based costing and activity-based management are two terms used to describe the same concept.

Which of the following items is not a product or customer-level activity?

Which of the following shows the steps required to implement activity-based costing in the correct order?

Step one of an activity-based costing (ABC)system is to:

Total companywide estimated overhead costs will change depending on if plant wide allocation or departmental allocation is used.

All of the following can be performed using ABC and ABM except:

Which of the following is an advantage of using activity-based costing (ABC)?

Gabriel Company uses the department approach for allocating overhead.The Assembly Department uses direct labor hours as its allocation base and the Grinding Department uses machine hours as its allocation base.The data for each is as follows: Estimated Cost Pool Allocation base Assembly Department \ 800,000 100,000 direct labor hours Grinding Department \ 300,000 5,000 machine hours What is the allocation rate for each Department (round to the nearest cent)?