The departmental overhead rate method uses multiple volume-based measures to allocate overhead to products. Distinguish between the plant-wide overhead rate method, the departmental overhead rate method and the activity-based costing method.
Trace Overhead Costs to Cost Pools
After a review of its overhead activities, KartCo established the following four activity cost pools.
Decision Maker
It is essential that the activities in each cost group are similar and reflect a similar level of activity. After a review and analysis of its activities, KartCo's management assigns its overhead costs to the four activity cost groups, as shown in Figure 4.10.
Decision Insight
Determine Activity Rate
KartCo plans to use 20,000 square feet of floor space to collect factory service costs. Let's remember that the overheads allocated to the plan changes and plant service cost pools or
Assign Overhead Costs to Cost Objects
By assigning overhead costs to products, KartCo has not assigned any design modification costs to standard carts because standard carts are sold as "off the shelf" items. This means that overhead costs in each activity pool are allocated to products based on the cost of resources consumed by a product (input) rather than on how many units are produced (output). In short, overhead cost allocation under ABC is more accurate because (1) there are more cost pools, (2) costs in each pool are more similar, and (3) allocation is based on activities that cause overhead costs.
More Effective Overhead Cost Control In traditional costing, overhead costs are typically allocated to products based on direct labor hours or machine hours. Consequently, a factory-wide overhead rate or a departmental overhead rate based on direct labor or machine hours can mislead managers, preventing effective control of overhead costs and leading to incorrect pricing. the product. In addition to controlling overhead costs, KartCo's better allocation of overhead costs (especially design modification costs) to its karts helps its managers make better production and pricing decisions.
Planning the Solution
A management consultant commented that activity-based costing may prove useful in assessing the costs of its legal services, and the firm has decided to evaluate its fee structure by comparing ABC with its alternative cost allocations. Determine the cost of providing legal services for each type of case using activity-based costing (ABC). Determine the costs for each type of case using a single plant-wide rate for non-legal fees based on billable hours.
Determine the costs for each type of case using multiple department costs for the internal support department (based on the number of documents) and the external support department (based on billable hours).
Solution to Demonstration Problem
We then determine the cost of providing each type of legal service as shown in the table below. Specifically, group fees from above are used to set costs for each type of service provided by the law firm. Since the litigation consumed 75 billable hours of attorney time, we assign billable hours $150 per billable hour) to the cost of providing legal advice for this type of matter.
This analysis shows that charging clients $300 per billable hour regardless of case type results in litigation clients being charged less than the cost of providing that service ($7,500 versus $9,044). The cost of each type of case using a single plant-wide rate for non-lawyer fees (that is, all costs except for those related to the provision of legal advice) based on billable hours is as follows. The cost of each type of case using multiple departmental overhead rates for the internal support department (based on number of documents) and external support department (based on billable hours) is determined as follows.
Summary
Guidance Answers to Decision Maker and Decision Ethics
Key terms are available at the book's website for learning and testing in an online flashcard format. An activity-based costing system is generally easier to implement and maintain than a traditional costing system. One of the goals of activity-based management is the elimination of waste by assigning costs to products that waste resources.
Activity-based costing uses multiple activity cost pools, each assigned to products based on direct labor hours. Activity levels in activity-based costing are calculated by dividing the costs from the first-level allocations by the activity rate for each activity cost group. He uses activity-based costing and prepares the following analysis that shows projected costs and activity for each of the three activity cost groups.
QUICK STUDY
Discussion Questions
What is the company's departmental cost if the assembly department allocates overhead based on direct labor hours and the finishing department allocates overhead based on machine hours. Calculate a single plant-wide overhead rate assuming the company allocates overhead based on 100,000 budgeted direct labor hours. Assign overhead costs to each product model using the single plant-wide overhead rate, assuming the fast model requires 25,000 direct labor hours and the standard model requires 60,000 direct labor hours.
The company provides technical support to users of its products, at an expected cost of $250,000 per year. Determine the unit setup costs for the wine glasses and for the commemorative vases if the setup costs are allocated on a single plant-wide overhead rate based on direct labor hours. Determine the unit setup costs for the wine glasses and for the commemorative vases if the setup costs are allocated based on the number of setups.
EXERCISES
Activity classification
Expected costs and activities for the forming department and for the cutting department for 2009 follow. Determine the overhead costs assigned to each product line using the plant-wide rate calculated in Requirement 1. Calculate a departmental overhead rate for the molding department based on machine hours and a departmental overhead rate for the trimming department based on direct labor hours.
Determine the total overhead costs assigned to each product line using the departmental overhead rates from requirement 3. When using departmental overhead rates, which of the following cost objects comes first in the cost allocation process. If management wants the most accurate product costs, which of the following cost accounting methods should be used?
Multiple choice overhead
Determine the total manufacturing cost per unit for the aluminum table lamp using the factory overhead rate. Use the department overhead rates from requirement 3 to determine the total manufacturing cost per unit for the aluminum table lamps. Using a factory-wide overhead rate based on machine hours, calculate the total cost per unit for each product line.
Determine the total cost per unit for each product line if the direct labor cost and direct material cost per unit are $250 for the Model 145 and $180 for the Model 212. Determine the departmental overhead rates and calculate the overhead costs per unit for each product line. Using direct labor hours as the basis for allocating overhead, determine the total manufacturing cost per unit for each product line.
PROBLEM SET A
Assessing impacts of using a
Calculate unit manufacturing costs using a factory-wide overhead rate based on direct labor hours. How much gross profit is made by each customer of product A using the factory-wide overhead rate. Using a factory-wide overhead rate based on direct labor hours, calculate the overhead that is assigned to each pup tent and each lift tent.
Using the total overhead rate, the total costs per unit for the two products if the direct materials and direct labor costs are $25 per puppy tent and $32 per pop-up tent. Use ABC to calculate the total price per unit for each tent if the direct labor and direct materials are $25 per puppy tent and $32 per pop-up tent. If the market price is $65 per puppy tent and $200 per pop-up tent, you must determine the gross profit per unit for each tent.
PROBLEM SET B
Assessing impacts of using a
Calculate the manufacturing cost per unit using the plant-wide overhead rate based on machine hours. Using a plant-wide overhead rate based on cases, calculate the overhead allocated to each case of Extra Fine Salsa and each case of Family Style Salsa. Using the plant-wide overhead rate, determine the total cost per unit for the two products if the direct materials and direct labor costs are $6 per case of Extra Fine and $5 per case of Family Style.
If the market price of Extra Fine Salsa is $18 per case and the market price of Family Style Salsa is. Using ABC, calculate the total cost per case for each product type if direct labor and material costs are $6 per Extra Fine case and $5 per Family Style case. If the market price is $18 per case of Extra Fine and $9 per case of Family Style, determine the gross profit per case for each product.
REPORTING IN ACTION
Would your price analysis be improved if the company used departmental rates, based on machine hours in department 1 and number of cases in department 2, instead of ABC. SERIES PROBLEM (This series problem began in Chapter 1 and continues throughout most of the book. What is the total cost of Job 6.15 if Success Systems applies overhead at 50% of direct labor costs.
Which approach to assigning overhead provides a better representation of the costs incurred to produce Job 6.15. Identify at least two activities at Best Buy and Circuit City that cause costs. Do you think these companies should be concerned with controlling the costs of the activities you have identified.
BEYOND THE NUMBERS
If the previous chapter segments were not completed, the serial problem may begin at this point. It is helpful, but not necessary, to use the Working Papers that accompany the book.). In a recent month, Lopez found that setup costs, inspection costs and supply costs accounted for most of its overhead.
Classify each of the three overhead activities as unit level, batch level, product level, or facility level. Would you classify Best Buy and Circuit City as service, merchandising or manufacturing companies?
COMPARATIVE ANALYSIS
ETHICS CHALLENGE
COMMUNICATING IN PRACTICE
TAKING IT TO THE NET
TEAMWORK IN ACTION
ENTREPRENEURIAL DECISION
Oregon Ice Cream Company has expanded its product offerings from basic chocolate and vanilla type flavors to nearly 100 flavors of ice creams, yogurts, and sorbets, and more than 500 dif-
HITTING THE ROAD
GLOBAL DECISION C4 A3
ANSWERS TO MULTIPLE CHOICE QUIZ
