Question

1. Indirect manufacturing costs are easily traceable to products. 2. One important reason that managers allocate overhead costs to products is to promote the efficient use of resources. 3. U.S. Generally Accepted Accounting Principles require all manufacturing costs be allocated to products for inventory costing purposes. 4. Total companywide estimated overhead costs will change depending on if plant wide allocation or departmental allocation is used. 5. The plant wide approach to allocating overhead is typically the simplest and least expensive approach 6. Companies that use the least number of cost pools possible tend to have the most accurate overhead allocation process. 7. Organizations can allocate overhead in a variety of ways, resulting in a number of different product costs for the same product. 8. Activity-based costing breaks total estimated overhead costs out into different departments to establish an overhead rate for each department 9. Value-added activities are typically ignored when using activity-based management. 10. Appraisal costs are the same as detection costs.

True or false

Answer 1

1. False

Explanation: Indirect manufacturing costs do change with the change in volume of production but these cannot be directly assigned to specific product. Instead these should be allocated after production to specific products taking into consideration their utilization for each product. These include Depreciation on equipment, small tools, screws, production manager's salary etc.

2. True

Explanation: Overheads cost include insurance expenses, depreciation Utilities, administrative salaries, etc. These costs are generally allocated to products to comply with US GAAP, for effective internal decision making & for promoting efficient use of resources.

3. True

Explanation: Manufacturing costs include direct materials, direct labor, and overheads cost. For inventory costing, US GAAP require these costs to be allocated to products.