Exam 11: Cost Allocation and Activity-Based Costing

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:

Zorn Co. budgeted $300,000 of factory overhead cost for the coming year. Its plantwide allocation base, machine hours, is budgeted at 50,000 hours. Budgeted units to be produced are 100,000 units. Zorn's plantwide factory overhead rate is $6.00 per machine hour.

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

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

Activity cost pools are cost accumulations associated with a given activity.

Activity rates are computed by dividing the cost budgeted for each activity pool by the estimated activity base for that pool.

Panamint Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base data by product are provided below. Determine the activity rate for materials handling per move.

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

The Transformations Hair Salon uses an activity-based costing system in its beauty salon to determine the cost of services. The salon has determined the costs of services by activity as follows:

The Aleutian Company produces two products, Rings and Dings. 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 $90,000. All of the labor hours take place in the Assembly department, which has an estimated total overhead of $105,000. The Aleutian Company uses a departmental overhead rates. The fabrication department uses machine hours for an allocation base, and the assembly department uses labor hours. What is the assembly department overhead rate per labor hour?

Panamint Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base data by product are provided below. Determine the activity rate for procurement per purchase order.

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?

Blackwelder Factory produces two similar products - small lamps and desk lamps. The total plant overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will require 275,000 direct labor hours and desk lamp production will need 125,000 direct labor hours. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the small lamp production if the actual direct hours for the period is 285,000?

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 Beauty Beyond Words Salon uses an activity-based costing system in its beauty salon to determine the cost of services. The salon has determined the costs of services by activity as follows:

Activity-based costing is much easier to apply than single plantwide factory overhead allocation.

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 desk lamp will require 1 hours of finishing and 2 hours of production, how much factory overhead will be allocated to each unit of desk lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours?

Blackwelder Factory produces two similar products - small lamps and desk lamps. The total plant overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will require 275,000 direct labor hours and desk lamp production will need 125,000 direct labor hours. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the desk lamp production if the actual direct hours for the period is 118,000?

Ratchford Clocks manufactures alarm clocks and wall clocks and allocates overhead based on direct labor hour. The production process is set up in three departments: assembly, finishing, and calibrating. The following is information regarding the direct labor used to produce one unit of the two clocks:

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. Handbags = 60,000 units, 3 hours of direct labor Moccasins= 40,000 units, 2 hours of direct labor Total Budgeted factory overhead cost = $360,000 The company has two different production departments: Cutting and Sewing. The cutting department has a factory overhead budget of $80,000. Each unit will require 1 direct labor hour or a total of 100,000 direct labor hours. The Sewing Departments estimates factory overhead in the amount of $280,000. Handbags require 2 hours of sewing time and Moccasins require 1 hour for a total of 160,000 labor hours. Calculate the total factory overhead to be allocated to each product using direct labor hours.