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Exam 26: Cost Allocation and Activity-Based Costing

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Question 31

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A single plantwide overhead rate method is very expensive to apply.

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Question 32

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When a plantwide factory overhead rate is used, overhead costs are applied to all products by a single rate.

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The Anazi Leather Company manufactures leather handbags and moccasins. 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 Department 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.

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. $\begin{array}{lrl}&\text { Activity }\\&\text { Cost }&\text { Activity Base }\\\hline\text { Frocurement } & \$ 370,000 & \text { Number of purchase orders } \\\text { Scheduling } & 250,000 & \text { Number of production orders } \\\text { Materials handling } & 500,000 & \text { Number of moves } \\\text { Product devel opment } & 730,000 & \text { Number of engineering changes } \\\text { Production } & 1,500,000 & \text { Machine hours }\end{array}$ -Determine the activity-based cost for each disk drive unit.

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. $\begin{array}{lrl}&\text { Activity }\\&\text { Cost }&\text { Activity Base }\\\hline\text { Frocurement } & \$ 370,000 & \text { Number of purchase orders } \\\text { Scheduling } & 250,000 & \text { Number of production orders } \\\text { Materials handling } & 500,000 & \text { Number of moves } \\\text { Product devel opment } & 730,000 & \text { Number of engineering changes } \\\text { Production } & 1,500,000 & \text { Machine hours }\end{array}$ -Determine the activity rate for procurement per purchase order.

If the activities causing overhead costs are different across different departments and products, use of a plantwide factory overhead rate will cause distorted product costs.

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 amount of factory overhead to be allocated is $38,525 if the allocation is based on direct labor hours).

Which of the following are the two most common allocation bases for factory overhead?

Multiple production department factory overhead rates are less accurate than are plantwide factory overhead rates.

The Sawtooth Leather Company manufactures leather handbags and moccasins. For simplicity, the company has decided to use a 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. Handbags = 60,000 units, 2 hours of direct labor Moccasins = 40,000 units, 3 hours of direct labor Total budgeted factory overhead cost = $360,000

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. $\begin{array}{lrl}&\text { Activity }\\&\text { Cost }&\text { Activity Base }\\\hline\text { Frocurement } & \$ 370,000 & \text { Number of purchase orders } \\\text { Scheduling } & 250,000 & \text { Number of production orders } \\\text { Materials handling } & 500,000 & \text { Number of moves } \\\text { Product devel opment } & 730,000 & \text { Number of engineering changes } \\\text { Production } & 1,500,000 & \text { Machine hours }\end{array}$ -Determine the activity-based cost for each wire drive unit.

Use of a plantwide factory overhead rate does not distort product costs when products require different ratios of allocation-base usage in each production department.

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. -If the budget estimates that a table lamp will require 2 hours of finishing and 1 hours of production, how much factory overhead will the Kaumajet Factory allocate to each unit of table lamp using the multiple production department factory overhead rate method with an allocation base of direct labor hours?

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. $\begin{array}{lrl}&\text { Activity }\\&\text { Cost }&\text { Activity Base }\\\hline\text { Frocurement } & \$ 370,000 & \text { Number of purchase orders } \\\text { Scheduling } & 250,000 & \text { Number of production orders } \\\text { Materials handling } & 500,000 & \text { Number of moves } \\\text { Product devel opment } & 730,000 & \text { Number of engineering changes } \\\text { Production } & 1,500,000 & \text { Machine hours }\end{array}$ -Determine the activity-based cost for each tape drive unit.

ABC is used to allocate selling and administrative expenses to each product based on the product's individual differences in consuming these activities.

Scoresby Co. uses 6 machine hours and 2 direct labor hours to produce Product X. It uses 8 machine hours and 16 direct labor hours to produce Product Y. Scoresby's Assembly and Finishing departments have factory overhead rates of $240 per machine hour and $160 per direct labor hour, respectively. How much overhead cost will be charged to the two products?

If selling and administrative expenses are allocated to different products, they should be reported as a

Using a plantwide factory overhead rate distorts product costs when:

Service companies can effectively use activity-based costing to compute product service) costs.

The Camper's Edge Factory produces two products-canopies and tents. It has two separate departments-Cutting and Sewing. The budget is $350,000 for the Cutting Department and $400,000 for the Sewing Department. Each canopy requires 2 hours of cutting and 1 hour of sewing. Each tent requires 1 hour of cutting and 6 hours of sewing. The budget estimates that 20,000 canopies and 10,000 tents will be manufactured during the year. Determine a) the total number of budgeted direct labor hours for the year in each department, b) the departmental factory overhead rates for both departments, and c) the factory overhead allocated per unit of each product using the department factory overhead allocation rates using direct labor hours as the base.