Question

Which of the following would be less likely to be used to allocate factory overhead when activity-based costing is employed?

a. Setups

b. Inspections

c. Direct labor costs

d. Engineering changes

An alternative approach for allocating factory overhead when there are diverse products and processes is

a. absorption costing.

b. variable costing.

c. activity-based costing.

d. All of these choices are correct.

Differential analysis may be used for the common decisions of leasing or selling equipment and manufacturing or purchasing a needed part.

a. This statement is true only for manufacturing companies.

b. This statement is true.

c. This statement is false.

d. This statement is true only for service companies.

Answer 1

Activity based costing uses cost drivers to allocate costs among products.

There are two types of manufacturing cost . Direct cost and indirect cost.

Direct Labor and Direct Material are direct cost. factory overhead is indirect cost.

Factory overhead cost are indirect costs that cannot be directly traced to manufacturing of product. examples of factory over head are rent, depreciation, utilities, set up cost, engineering changes cost, machine maintenance, inspection cost etc.

Direct material cost, direct labor cost are not factory overhead but they are direct costs which can be traced to the different products and allocated to them directly..

costs of setup of machinery is factory overhead and number of set ups are used to allocate set up cost.

Inspection cost is factory overhead and number of inspections are used to allocate set up cost to different products.

Engineering changes made cost are factory over head.

Direct labor cost are not factory overhead and will not be used while allocating the cost under Activity based costing.

HENCE, given all are used to allocate factory overhead except direct Labor cost.

Answer C