Question

1. Which costing method assumes all products use overhead costs in the same proportions?

a. Activity-based costing c. Departmental overhead rate method

b. Plantwide overhead rate method d. All cost allocation methods

2. Which of the following would usually not be used in computing plantwide overhead rates?

a. Direct labor hours c. Direct labor dollars

b. Number of quality inspections d. Machine hours

3. With ABC, overhead costs should be traced to which cost object first?

a. Units of product c. Activities

b. Departments d. Product batches

Short answer

1. Plant-wide overhead rate method.
2. The number of quality inspections.
3. Activities.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Activity-based Costing

Activity-based costing is a method in which more than one rate is used, and it is the most accurate method and assigns the costs based on activities rather than departments.

The explanation for part 1

In the following cases, a plant-wide rate may be sufficient:

1. The indirect manufacturing expenses have one root source.
2. The firm makes similar goods.
3. The company's inventory is kept to a minimum and is stable.

Therefore, option (b), the plant-wide overhead rate method, is correct.

The explanation for part 2

The following items are not included in factory overhead:

1. Materials used to make the product
2. Employee expenses for those who are actively producing the goods
3. External administrative costs, such as an outside headquarters or human resources, are not included in the budget.
4. Salary, travel, and advertising expenditures are all included in sales and marketing expenses.

Therefore, option (b) number of quality inspections is the correct option.

The explanation for part 3

ABC uses the practice of dividing overhead consumption for goods and administration such as finance and utilities. In comparison to the old approach of costing, activity-based costing makes the allotment of indirect costs simpler.

Therefore option (c), i.e., activities, is the correct option.