Exam 26: Cost Allocation and Activity-Based Costing

Shubelik Company is changing to an activity-based costing method. They have determined that they will use three cost pools. They are setups, inspections, and assembly. Which of the following would be used as the activity base for assembly?

Activity-based costing can only be used to allocate manufacturing factory overhead.

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

Managers depend on product costing to make decisions regarding continuing operations, advertising, and product mix.

The Pikes Peak Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the 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 Bonnington Company manufactures small lamps and desk lamps. The following shows the activities per product: Using the following information prepared by the Bonnington Company, determine the total factory overhead to be charged to small lamps.

Use of a plantwide factory overhead rate does not distort product costs when there are differences in the factory overhead rates across different production departments.

Product costing consists of only direct materials and direct labor.

The Anazi Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the multiple production department factory overhead rate to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.

Adirondak 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. Calculate the plantwide factory overhead rate:

Given the following information, determine the activity rate for setups.

Service companies can effectively use multiple department overhead rate costing to compute product (service) costs.

When production departments differ significantly in their manufacturing process, it is recommended that the single plantwide factory overhead rate be used for allocating factory overhead.

The Ramapo Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and Assembly. Data for the products and departments are listed below. All of the machine hours take place in the Fabrication department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly department, which has an estimated total overhead of $72,000. The Ramapo Company uses a single overhead rate to apply all overhead costs based on labor hours. What is the overhead cost per unit for Blinks?

Direct labor hours is not a cost pool that is regularly used in the activity-based costing method.

The Sawtooth Leather Company manufactures leather handbags and moccasins. For simplicity reasons, they have decided to use the single plantwide factory overhead rate method to allocate factory overhead. Calculate the amount of factory overhead to be allocated to each unit using direct labor hours.

Explain why it is imperative that proper factory overhead be allocated in factories that produce multiple products.

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).

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 be allocated to each unit of table lamp using the multiple production department factory overhead rate method with an allocation base of direct labor hours?

Using multiple department factory overhead rates instead of a single plantwide factory overhead rate: