Question

c. assigns activity cost pools to products and services, then allocates overhead back to the activity cost pools. d. allocates overhead directly to products and services based on activity levels e. none of these answers are correct. 21. Which of the following has the weakest linkage between activity and cost driver? Activity Machine setup Machine maintenance Lighting on shop floor Quality control Manual cloth making Cost Driver Number of setups Book value of machines Number of kilowatt-bours Square feet of floor space Direct labor hours 22. Hollyhock Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes $412,000 paroll for 4 800 direct labor hours. Listed below is cost driver information used in the product-costing system: Overhead Cost Pool Machine setups Material handling Quality control Other overhead cost Total Overhead Budgeted Overhead $ 120,000 104,400 264,000 144,000 $ 632,400 Cest Driver of setups of barrels of inspections #of machine hours Estimated Cost Driver Leve! 120 setups 8,700 barrels 1.100 inspections 12,000 machine hours A current product order has the following requirements: Machine setups Material handling Quality inspections Machine hours Direct labor hours 8 setups 606 barrels 80 inspections 30 machine hours 336 hours What is the total manufacturing overhead for the current product order if the firm uses a plantwide rate based on direct labor-hours? a $ 9,960, b. S 30.240 C$ 43.741 d. S 44,268. e. $109,352 23. Assigning overhead using ABC will usually a decrease the cost per unit for low volume products as compared to a traditional overhead allocation. b. increase the cost per unit for low volume products as compared to a traditional overhead allocation c. provide less accurate cost per unit for low volume products than will traditional costing. d. result in the same cost per unit for low volume products as does traditional costing. e none of these answers are correct. 24. In an organization that makes furniture, which of the following is a high value-added activity!

Answer 1

(21)

The weakest linkage is between option (d) Quality control – square feet of floor space

Machine set up is connected to number of set ups. Machine maintenance can be calculated on the percentage of the value of machine. Similarly lighting is connected with kilowatt hours. Similarly manual work of cloth making linked with direct labor hours.

But quality control is usually related with machines or products, not with square feet of floor space.

(22) Answer (d) 44268

Overhead cost pool	Budgeted OH	Cost driver	Estimated Cost driver Level	Overhead cost per unit of cost driver
Machine set ups	1,20,000.00	Set up	120	1000
Material handling	1,04,400.00	Barrels	8700	12
Quality control	2,64,000.00	Inspections	1100	240
Other overhead cost	1,44,000.00	machine hours	12000	12
Payroll	4,32,000.00	direct labor hours	4800	90

However here it is asked for plant wide rate based on labor hours:-

Total overhead= $632400

Direct labor Hours= 4800 direct labor hours

Plant wide rate = Total overhead/ direct labor hours

                             = 632400/4800

                             = $ 131.75 per direct labor hour

Hence total manufacturing overhead for the current product order if the firm uses a plantwide rate based on direct labor hours:-

      =       Direct labor hours for the product * plant wide rate

      = 336 hours * 131.75

     = 44,268

(23) Answer (e) None of these answers are correct

In ABC costing, cost are assigned to activities and procedures while traditional costing assigns cost to the product. However these differences in the costing system is not affected by the volume of product.

Volume of a product won’t be a reason for difference in traditional and ABC costing. Hence 23(a) and 23(b) are wrong. Accuracy of ABC system is not affected with the volume of products.Hence 23(c) is wrong. Regardless of low or high volume products, cost with traditional costing or ABC costing will not change due to that reason. Cost with both the costing system changes because, ABC costing assigns cost to each activity, while traditional costing assigns cost to the product.