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Exam 26: Cost Allocation and Activity-Based Costing

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Question 41

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A plantwide factory overhead rate is computed by dividing total budgeted factory overhead costs by the plantwide allocation base.

A) True
B) False

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Question 42

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Condelezza Co. manufactures two products, A and B, in two production departments, Assembly and Finishing. Condelezza Co. expects to produce 10,000 units of Product A and 20,000 units of Product B in the coming year. Budgeted factory overhead costs for the coming year are: $\begin{array}{ll}\text { Assembly } & \$ 310,000 \\\text { Finishing } & \$ 240,000 \\\text { Total } & \$ 550,000\end{array}$ The machine hours expected to be used in the coming year are as follows: $\begin{array}{crr}&\text { Assembly } & \text { Finishing } \\&\text { Dept. } & \text { Dept. }\\\text { Froduct A } & 15,100 & 9,000 \\\text { Froduct B } & \underline{4,900} & \underline{11,000} \\\text { Total } & \underline{20,000} & \underline{20,000}\end{array}$ a) Compute the plantwide factory overhead rate. Compute the production department factory overhead rates. b) Compute the factory overhead per unit for each product using 1) the single plantwide rate and 2) production department factory overhead rates. c) Which method is better plantwide or department)? Why?

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a) Factory overhead rates:
Plantwide = $...

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Question 43

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Activity rates are determined by

Activity-based costing for selling and administrative expenses can also be beneficial in allocating expenses to various products. Which of the following is the best allocation base for help desk costs?

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. $\begin{array}{llll}&&\text { Pabor Hours } & \text { Machine Hours } \\\text { Product } & \text { Number of Units } & \text { Per Unit } & \text { Per Unit }\\\text { Rings } & 1,000 & 4 & 6 \\\text { Dings } & 2,000 & 3 & 9\end{array}$ 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 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?

Activity cost pools are assigned to products, using factory overhead rates for each activity.

Blue Ridge 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. The following table presents information about estimated overhead and direct labor hours. -Using a single plantwide rate, determine the overhead rate per unit for Blue Ridge Marketing Inc.'s Product B.

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

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

Which of the following is not a factory overhead allocation method?

Managers depend on accurate factory overhead allocation to make decisions regarding product mix and product price.

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 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. $\begin{array}{llll}&&\text { Pabor Hours } & \text { Machine Hours } \\\text { Product } & \text { Number of Units } & \text { Per Unit } & \text { Per Unit }\\\text { Rings } & 1,000 & 4 & 6 \\\text { Dings } & 2,000 & 3 & 9\end{array}$ 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 departmental overhead rates. The Fabrication Department uses machine hours for an allocation base, and the Assembly Department uses labor hours. -What is the Fabrication Department overhead rate per machine hour?

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 for Adirondack Marketing Inc.

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. $\begin{array}{llll}&&\text { Pabor Hours } & \text { Machine Hours } \\\text { Product } & \text { Number of Units } & \text { Per Unit } & \text { Per Unit }\\\text { Rings } & 1,000 & 4 & 6 \\\text { Dings } & 2,000 & 3 & 9\end{array}$ 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 departmental overhead rates. The Fabrication Department uses machine hours for an allocation base, and the Assembly Department uses labor hours. -What is the overhead cost per unit for Dings?

Ratchford Clocks manufactures alarm clocks and wall clocks and allocates overhead based on direct labor hours. 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: $\begin{array} { | l | c | c | c | } \hline \text { Per Unit Hours } & \text { Assembly } & \text { Finishing } & \text { Calibrating } \\\hline \text { Alarm clocks } & 3 & 1 & 1 \\\hline \text { Wall clocks } & 2 & 3 & 2 \\\hline & \underline { 5 } & \underline { 4 } & \underline { 3 } \\\hline\end{array}$ The budget includes the following factory overhead by department: $\begin{array}{|l|c|}\hline \text { Assembly Department } & \$ 595,000 \\\hline \text { Finishing Department } & 200,000 \\\hline \text { Calibrating Department } & 140,000 \\\hline \text { Total } & \$ 935,000 \\\hline\end{array}$ Ratchford Clocks is planning to manufacture 50,000 alarm clocks and 10,000 wall clocks. a) Determine the total number of hours that will be needed by department. b) Determine the factory overhead rate by department using the multiple production department factory overhead rate method. c) Determine the amount of factory overhead to be allocated to each unit of alarm clocks and wall clocks. d) Determine the amount of total factory overhead to be allocated to the alarm clocks and wall clocks.

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

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: $\begin{array} { | l | c | } \hline \text { Activity } & \text { Activity Rate } \\\hline \text { Hair washing } & \$ 4.00 \\\hline \text { Conditioning } & \$ 3.50 \\\hline \text { Chemical treatment } & \$ 25.00 \\\hline \text { Styling } & \$ 10.00 \\\hline\end{array}$ $\begin{array} { | l | c | c | c | c | } \hline & \text { Hair } & \text { Conditioning } & \begin{array} { c } \text { Chemical } \\\text { Treatment }\end{array} & \text { Styling } \\\hline \text { Haircut } & 1 & 1 & 0 & 0 \\\hline \text { Complete style } & 1 & 1 & 0 & 1 \\\hline \text { Perm } & 2 & 3 & 1 & 1 \\\hline \text { Highlights } & 3 & 4 & 2 & 1 \\\hline\end{array}$ -The total factory overhead for Big Light Company is budgeted for the year at $807,500. Big Light manufactures two different products - night lights and desk lamps. Night lights is budgeted for 60,000 units. Each night light requires 1/2 hour of direct labor. Desk lamps is budgeted for 80,000 units. Each desk lamp requires 2 hours of direct labor. Determine a) the total number of budgeted direct labor hours for year, b) the single plantwide factory overhead rate using direct labor hours as the allocation base, and c) the factory overhead allocated per unit for each product using the single plantwide factory overhead rate calculated in b).

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

The Skagit Company manufactures Hooks and Nooks. The following shows the activities per product and total activity information: $\begin{array} { | l | c | c | c | } \hline & \text { Setups } & \text { Inspections } & \text { Assembly dlh) } \\\hline \text { Hooks-4,000 units } & 1 & 3 & 1 \\\hline \text { Nooks-8,000 units } & 2 & 2 & 3 \\\hline & & & \\\hline\end{array}$ $\begin{array} { | l | c | c | } \hline \text { Activity Pool } & \text { Activity Base } & \text { Budgeted Amount } \\\hline \text { Setups } & 20,000 & \$ 60,000 \\\hline \text { Inspections } & 24,000 & 120,000 \\\hline \text { Assembly dlh) } & 28,000 & 420,000 \\\hline\end{array}$ -Calculate the total factory overhead to be charged to each unit of Hooks.