Question

Accounting Chapter 5 a. What are the conditions where you would use a department overhead rate over a plantwide overhead rate? C. What is the formula under ABC for activity cost allocation rate? d. What are examples of facility level costs? e. What are the steps that are performed at the beginning of the year for ABC Costing? f. What typically falls under each of these types of costs: unit-level cost, batch-level cost, product- level cost, facility-level cost? g. You are given a list of activities, their estimated overhead costs and their estimated activity (4 of them). You are told that they currently use a plantwide rate and what their estimated machine hours is. How would you solve the activity cost allocate rate for one of the 4 activities?

Answer 1

Answer is given below

a) When a product goes through different departments for manufacturing different departmental rate may be used When departmental overhead cost drivers are different departmental overhead rates are preferred Plant wide overhead rate uses a single rate whereas departmental overhead rate is based on the cost driver in the respective department c) Activity cost driver rate = Total Activity Cost/Total activities example of facility cost Plant building depreciation Plant Property taxes Plant insurance Plant maintenance e) steps performed at beginning of the year for ABC Costing 1 identification of activities required for the products manufactured 2 assign overheads to the activities identified in step 1 3 identify cost driver for each of the activates identified in step 1 4 Calculate cost driver rate for each of the activity cost pool 5 Allocate cost to the products based on the activities consumed by each product Unit-level Cost Costs directly associated with unit level production Examples: Direct material Direct labor Batch -level Cost Costs incurred at batch level for the product Examples: Purchase order Equipment set up Quality tests performed Product-level Cost Costs incurred at Product level and not at each unit level Examples: Product design cost Assembly cost Storage of each product Facility-level Cost Costs incurred which facilitates the production Examples: Plant building depreciation Plant Property taxes Plant insurance g) Total estimated activity cost for each activity/Total activities for each = Activity cost allocation rate Activity cost allocation rate is calculated at each activity Hence there will be 4 different activity rates in the given case Machine hour is one of the activity drivers. Hence it will also be used for activity rate calculation