Chapter 17: Q8DQ (page 787)
Why are multiple departmental overhead rates more accurate for product costing than a single plantwide overhead rate?
The departmental overhead rate approach is more accurate than the plantwide overhead rate because the probability of inaccurate allocation to product minimizes.
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A manufacturer uses activity-based costing to assign overhead costs to products. In the coming year it expects to incur $825,000 of costs to dispose of 3,300 tons of hazardous waste.
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.
Samsung is a manufacturer. "Activity based costing is only useful for manufacturing companies." Is this a true statement? Explain.
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
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.
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