Financial and Managerial Accounting, 8e (Wild)
Chapter 17 Activity-Based Costing and Analysis
1) Overhead costs are indirect costs so assigning these costs to products requires an allocation
method.
2) The activity-based costing method uses volume-based measures to allocate overhead costs.
3) Product costs consist of direct labor, direct materials, and overhead (indirect) costs.
4) Distorted product cost information can result in poor decisions.
5) Overhead costs are not directly related to production and cannot be traced to units of product
like direct materials and direct labor can.
6) The cost to heat a manufacturing facility can be directly linked to the number of units
produced.
7) Examples of volume-related measures include direct labor hours and machine hours.
8) Departments are the cost objects when the plantwide overhead rate method is used.
9) The plantwide overhead rate is total plantwide allocation base divided by total budgeted
plantwide overhead cost.
10) The unit of product is the cost object when the plantwide overhead rate method is used.
11) The plantwide overhead rate is determined using volume-related measures.
12) Data concerning volume-related measures are readily available in most manufacturing
settings.
13) The departmental overhead rate method uses a different overhead rate for each production
department.
14) The departmental overhead rate method uses the same overhead rate for each production
department.
15) By definition, costs classified as overhead are consumed in basically the same manner
regardless of the process involved.
16) Products are the first stage cost objects when using a departmental overhead rate method.
17) The departmental overhead rate method allows each department to have its own overhead
rate and its own allocation base.
18) The departmental overhead rate method involves the following four steps: 1) Assign
overhead costs to departmental cost pools, 2) select an allocation base for each department, 3)
compute overhead allocation rates for each department, and 4) use departmental overhead rates
to assign overhead costs to products.
19) The premise of ABC is that it takes activities to make products and provide services and
these activities drive costs.
20) Activities are the cost objects of the second stage of ABC.
21) Activities are the cost objects of the first stage of ABC.
22) A cost pool is a collection of costs that are related to the same or similar activity.
23) Activity-based costing first assigns costs to products and then uses these product costs to
assign costs to manufacturing activities.
24) A single cost pool is used when allocating overhead using the activity-based costing method.
25) Multiple cost pools are used when allocating overhead using the plantwide overhead rate
method.
26) Management’s pricing and cost decisions for a product are influenced by that product’s cost
assignments.
27) A major disadvantage of using a plantwide overhead rate is the extreme difficulty in
gathering the needed information.
28) The usefulness of overhead allocations based on a plantwide overhead rate depends on two
crucial assumptions: (1) the overhead cost is correlated with the allocation base; and (2) all
products use overhead cost in dissimilar proportions.
29) The usefulness of overhead allocations based on a plantwide overhead rate depends on two
crucial assumptions: (1) the overhead cost is correlated with the allocation base; and (2) all
products use overhead cost in similar proportions.
30) Some companies allocate their overhead cost using a plantwide overhead rate largely
because of its simplicity.
31) Allocated overhead costs vary depending upon the allocation methods used.
32) When products differ in batch size and complexity, they usually consume different amounts
of overhead resources.
33) Overhead costs are often affected by many issues and are frequently too complex to be
explained by any one factor.
34) Compared to the departmental overhead rate method, the plantwide overhead rate method
usually results in more accurate overhead allocations.
35) Compared to the plantwide overhead rate method, the departmental overhead rate method
usually results in more accurate overhead allocations.
36) Because departmental overhead costs are allocated based on measures closely related to
production volume, they accurately assign overhead, such as utility costs.
37) The use of a plantwide overhead rate is not acceptable for external reporting under GAAP.
38) ABC allocates overhead costs to products based on activities rather than direct labor or
machine hours.
39) ABC can be used to assign costs to any cost object that is of management interest.
40) ABC is significantly less costly to implement and maintain than more traditional overhead
costing systems.
41) ABC is more costly to implement and maintain than more traditional overhead costing
systems.
42) When using the plantwide overhead rate method, total budgeted overhead costs are combined
into one overhead cost pool.
43) Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for
indirect labor and $400,000 for factory utilities. The company uses direct labor hours as its
overhead allocation base. If 50,000 direct labor hours are planned for this next year, then the
plantwide overhead rate is $.025 per direct labor hour.
44) Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for
indirect labor and $400,000 for factory utilities. The company uses direct labor hours as its
overhead allocation base, and plans to use 50,000 direct labor hours for this next year. If a
product uses 5 direct labor hours, then it will be assigned $200 in overhead costs.
45) A company estimates that costs for the next year will be $500,000 for indirect labor, $50,000
for factory utilities, and $1,000,000 for the CEO’s salary. The company uses machine hours as its
overhead allocation base. If 25,000 machine hours are planned for this next year, then the
plantwide overhead rate is $22 per machine hour.
46) A company estimates that costs for the next year will be $500,000 for indirect labor, $50,000
for factory utilities, and $1,000,000 for the CEO’s salary. The company uses machine hours as its
overhead allocation base. If 25,000 machine hours are planned for this next year, then a product
requiring 10 machine hours will be assigned $220 in overhead.
47) A company estimates total overhead costs for the next year to be $1,200,000 and wishes to
use direct labor hours as its overhead allocation base. This company makes two products: (1)
Fancy X, which requires three direct labor hours per unit, and (2) Plain X, which requires one
direct labor hour per unit. If the company plans to make 10,000 units of Fancy X and 10,000
units of Plain X, then each unit produced will be allocated the same amount of overhead.
[The following information applies to the questions displayed below.]
Malone Company sells two products Big X and Little X. Current direct material and direct labor
costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with
direct labor hours as its allocation base. Next year’s overhead is estimated to be $510,000. The
direct labor and direct materials costs are estimated to be consistent with the current year. Direct
labor costs $20 per hour and the company expects to manufacture 15,000 units of Big X and
18,000 units of Little X next year.
Direct
Material
per Unit
Direct
Labor Dollars
per Unit
Big X
$
5
$
18
Little X
$
3
$
12
48) Malone has 33,000 total estimated direct labor hours for next year.
49) Malone’s plantwide overhead rate will be $20.99 per direct labor hour next year.
50) If the direct labor time estimates are met, Malone will allocate $12.59 of overhead cost to
each unit of Little X.
51) The first step in using the departmental overhead rate method requires that overhead be
traced to each of the company’s departments.
52) The departmental overhead rate method traces costs to each department and then determines
an allocation base for each department.
53) Turtle Company produces t-shirts that go through two operations, cutting and sewing, before
they are complete. Expected costs and activities for the two departments are shown below. Given
this information, the departmental overhead rate for the cutting department based on direct labor
hours is $2.69 per direct labor hour (rounded to two decimals).
Sewing
Direct labor hours
250,000
DLH
75,000
DLH
Machine hours
125,000
MH
150,000
MH
Overhead costs
$
500,000
$
375,000
54) A company produces heating elements that go through two operations, casting and
assembling, before they are complete. Expected costs and activities for the two departments are
shown below. Given this information, the departmental overhead rate for the assembling
department based on direct labor hours is $5 per direct labor hour.
Casting
Assembling
Direct labor hours
1,875
DLH
7,500
DLH
Machine hours
12,500
MH
3,750
MH
Overhead costs
$
75,000
$
37,500
55) A company produces paint that goes through two operations, operation A and operation B,
before it is complete. Expected costs and activities for the two departments are shown below.
Given this information, the departmental overhead rate for Department B based on machine
hours is $4 per machine hour.
Department A
Department B
Machine hours
50,000
MH
60,000
MH
Direct labor hours
78,500
DLH
100,800
DLH
Overhead costs
$
392,500
$
403,200
56) A company produces computer chips that go through two departments, department A1 and
department B2, before they are complete. Expected costs and activities for the two departments
are shown below. Departmental overhead rates are based on machine hours in department A1
and direct labor hours in department B2. Therefore, the overhead rates for department A1 and
department B2 are $3.62 per machine hour and $5.73 per direct labor hour, respectively.
Department A1
Department B2
Machine hours
40,000
MH
30,000
MH
Direct labor hours
36,200
DLH
28,650
DLH
Overhead costs
$
144,800
$
171,900
57) A company produces garden benches that go through two departments, department 1A1 and
department 2B2, before they are complete. Expected costs and activities for the two departments
are shown below. Both departments have departmental overhead rates based on machine hours.
Therefore, the overhead rates for department 1A1 and department 2B2 are the same.
Department 1A1
Department 2B2
Machine hours
70,000
MH
60,000
MH
Direct labor hours
56,350
DLH
50,160
DLH
Overhead costs
$
225,400
$
250,800
58) A company produces surgical equipment that goes through three departments, 1A1, 2B2, and
3C3, before they are complete. Expected costs and activities for the three departments are shown
below. All departments have departmental overhead rates based on direct labor hours. Therefore,
the overhead rate for each department is $5 per direct labor hour.
Department 1A1
Department 2B2
Department 3C3
Machine hours
15,000
MH
25,000
MH
20,000
MH
Direct labor hours
22,830
DLH
10,650
DLH
29,200
DLH
Overhead costs
$
114,150
$
213,000
$
73,000
59) Activity-based costing involves four steps: (1) identify activities and the costs they cause, (2)
group similar activities into cost pools, (3) determine an activity rate for each activity cost pool,
and (4) allocate overhead costs to products using those activity rates.
60) The more activities tracked by activity-based costing, the more accurately overhead costs are
assigned.
61) In activity-based costing, an activity can involve several related tasks.
62) Activities causing overhead cost in an organization are typically separated into four levels:
(1) direct activities, (2) indirect activities, (3) batch level activities, and (4) facility level
activities.
63) Machine setup costs are an example of a batch level activity.
64) Product design costs are an example of a unit level activity.
65) Facility-level costs are not traceable to individual product lines, batches or units.
66) Activity-based costing eliminates the need for overhead allocation rates.