Both plantwide and departmental rates rely on unit-level drivers to assign overhead to products. However, not all overhead is caused by or related to units produced. Setup costs, for example, are incurred each time a batch is produced and a patch may consist of 1,000 units or 10,000 units. Setup costs tend to increase as batches increase-not as units produced increase. There are other factors, called non-unit drivers, which better measure the demand that products place on no unit overhead activities. If non-unit overhead resources are a significant portion of total overhead, then using only unit-based drivers to assign overhead may create distorted product costs. Distorted product costs will not occur provided that

Both plantwide and departmental rates rely on unit-level drivers to assign overhead to products. However, not all overhead is caused by or related to units produced. Setup costs, for example, are incurred each time a batch is produced and a patch may consist of 1,000 units or 10,000 units. Setup costs tend to increase as batches increase-not as units produced increase. There are other factors, called non-unit drivers, which better measure the demand that products place on no unit overhead activities. If non-unit overhead resources are a significant portion of total overhead, then using only unit-based drivers to assign overhead may create distorted product costs. Distorted product costs will not occur provided that

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter4: Activity-based Costing

Section: Chapter Questions

Problem 4CE: Larsen, Inc., produces two types of electronic parts and has provided the following data: There are...

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Larsen, Inc., produces two types of electronic parts and has provided the following data: There are four activities: machining, setting up, testing, and purchasing. Required: 1. Calculate the activity consumption ratios for each product. 2. Calculate the consumption ratios for the plantwide rate (direct labor hours). When compared with the activity ratios, what can you say about the relative accuracy of a plantwide rate? Which product is undercosted? 3. What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plantwide rate?
A CPA would recommend changing from plantwide overhead rate application to departmental rates under which of the following circumstances? a. The plant produces one product. b. The plant produces multiple products that may or may not pass through all producing departments. c. The plant produces multiple products that pass through all of the producing departments. d. The plant produces many different products that consume the same amount of resources in each producing department.
Activity-Based Costing Both plantwide and departmental rates rely on unit-level drivers to assign overhead to products. However, not all overhead is caused by or related to units produced. Setup costs, for example, are incurred each time a batch is produced and a batch may consist of 1,000 units or 10,000 units. Setup costs tend to increase as batches increase—not as units produced increase. There are other factors, called non-unit drivers, which better measure the demand that products place on non-unit overhead activities. If non-unit overhead resources are a significant portion of total overhead, then using only unit-based drivers to assign overhead may create distorted product costs. Distorted product costs will not occur provided that products consume the non-unit overhead activities in (THE SAME PROPORTION/ DIFFERENT PROPORTIONS) as the unit-level activities. Product cost distortion requires that product diversity, which means simply that products consume overhead activities in…
Which of the following statements is true? 1. Departmental overhead rates will correctly assign overhead costs in situations where a company has a range of products that differ in volume, lot size, or complexity of production. 2. When a company implements activity-based costing, manufacturing overhead cost is often shifted from low volume products to high volume products, with a higher unit cost resulting for the high volume products. 3. Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.
A stapler manufacturer uses a single plantwide predetermined overhead allocation rate to allocate its indirect costs. The CFO thinks this process could be inaccurate. Which of the following statement is incorrect, if the manufacture makes the transition to using multiple predetermined overhead allocation rates? A. The allocation process changes because there are now multiple cost pools and multiple allocation bases. B. Management must analyze the expected overhead costs and separate them into a cost pool for each department. C. In selecting machine usage as the primary cost driver for the Production Department, management feels that there is a direct relationship between the number of machine hours used and the amount of overhead costs incurred. D. The use of multiple predetermined overhead allocation rates is more complex, but it may be more accurate.
When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system with batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase. Please explain (True or False) thoroughly.
One of the disadvantages of the departmental and the plantwide overhead rate methods is that OA. technological advances may decrease the effect of direct labor hours as a percentage of total manufacturing costs. B. technological advances may increase direct labor hours as a percentage of total manufacturing costs. OC. direct labor hours may decrease the effect of technological advances. OD. direct labor hours may increase the effect of technological advances.
Mirabile Corporation uses activity-based costing to compute product margins. Overhead costs have already been allocated to the company's three activity cost pools--Processing, Supervising, and Other. The costs in those activity cost pools appear below: Processing Supervising Other Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the other activity cost pool are not assigned to products. Activity data appear below: Product MO Product M5 Total $ 3,800 $ 23,800 $ 10,400 MHs (Processing) 9,700 300 10,000 Sales (total) Direct materials (total) Direct labor (total) Batches (Supervising) 500 500 1,000 Finally, sales and direct cost data are combined with Processing and Supervising costs to determine product margins. Product Mº $ 74,100 $ 28,500 $ 27,800 Product M5 $ 89,900 $ 31,400 $ 41,700
Please explain thoroughly with examples. Which statement(s) is True/False and why? If none are true, please restate them to be true. 1. When a company implements activity-based costing, manufacturing overhead cost is often shifted from low volume products to high volume products, with a higher unit cost resulting for the high volume products. 2. When a company implements activity-based costing, manufacturing overhead cost is often shifted from low volume products to high volume products, with a higher unit cost resulting for the low volume products. 3. When a company implements activity-based costing, manufacturing overhead cost is often shifted from high volume products to low volume products, with a higher unit cost resulting for the high volume products. 4. When a company implements activity-based costing, manufacturing overhead cost is often shifted from high volume products to low volume products, with a higher unit cost resulting for the low volume products.
If the activities that generate overhead costs vary between departments and products, adopting a plantwide manufacturing overhead rate would result in skewed product costs.True \sFalse
Which of the following statements is false? (You may select more than one answer.)a. Absorption costing assigns fixed and variable manufacturing overhead costs toproducts.b. Job-order costing systems are used when companies produce many different typesof products.c. A normal costing system assigns costs to products by multiplying the actualo verhead rate by the actual amount of the allocation base.d. A company such as Coca-Cola is more likely to use a process costing system thana job-order costing system.
If the single plantwide overhead rate is the easiest method to allocate support department costs to production departments, why would a company use a more complicated method?