Chapter 17: Q7DQ (page 787)
Explain why a single plantwide overhead rate can distort the cost of a particular product.
Depending on the product and input levels, plantwide overhead rates can skew prices for a particular product.
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What is a cost object?
In conducting interviews and observing factory operations to implement an activity-based costing system, you determine that several activities are unnecessary or redundant. For example, warehouse personnel were inspecting purchased components as they were received at the loading dock. Later that day, the components were inspected again on the shop floor before being installed in the final product. Both of these activities caused costs to be incurred but were not adding value to the product. If you include this observation in your report, one or more employees who perform inspections will likely lose their jobs.
Required
1. As a plant employee, what is your responsibility to report your findings to superiors?
2. Should you attempt to determine if the redundancy is justified? Explain.
3. What is your responsibility to the employees whose jobs will likely be lost because of your report?
4. What facts should you consider before making your decision to report or not?
Grandy Oats has expanded its product offerings to include many varieties of organic granola. Company founders Nat Peirce and Aaron Anker know that financial success depends on cost control as well as revenue generation.
Required
1. If GrandyOats wanted to expand its product line to include organic energy bars, what activities would it need to perform that are not required for its current product lines?
2. Related to part 1, should the additional overhead costs related to new product lines be shared by existing product lines? Explain your reasoning.
The chief executive officer (CEO) of your company recently returned from a luncheon meeting
where activity-based costing was presented and discussed. Though her background is not in accounting, she has worked for the company for 15 years and is thoroughly familiar with its operations. Her impression of the presentation about ABC was that it was just another way of dividing up total overhead cost and that the total would still be the same “no matter how you sliced it.”
Required
Write a memorandum to the CEO, no more than one page, explaining how ABC is different from traditional volume-based costing methods. Also, identify its advantages and disadvantages vis-à-vis traditional methods. Be sure it is written to be understandable to someone who is not an accountant.
What are three common methods of assigning overhead costs to a product?
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