When applying overhead to products in an activity-based costing system:
a. Cash or a liability is debited and Manufacturing Overhead is credited.
b. Manufacturing Overhead is debited and Cash or a liability is credited.
c. Manufacturing Overhead is debited and Work In Process is credited.
d. Work In Process is debited and Manufacturing Overhead is credited
Matt Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 6,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows:
Activity Cost PoolEstimated Cost ProductA Product B Total
Activity 1 $ 20,000 100 400 500
Activity 2 $ 37,000 800 200 1,000
Activity 3 $ 91,200 800 3,000 3,800
The cost per unit of Product A under activity-based costing is closest to:
Departmental overhead rates may not correctly assign overhead costs due to:
a. the use of direct labor hours in allocating overhead costs to products rather than machine time or quantity of materials used.
b. the high correlation between direct labor-hours and the incurrence of overhead costs.
c. overreliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production
d. difficulties associated with identifying cost pools for the first stage of the allocation process.
Vex Corporation manufactures a variety of products. In the past, Vex had been using a traditional overhead allocation system based on machine hours. For the current year, Vex decided to switch to an activity-based costing system using machine hours and the number of inspections as measures of activity. Information on these measures of activity and related overhead rates for the current year is as follows:
Estimated ActivityPredetermined Overhead Rate
Machine hours 50,000 $ 8.00
Number of inspections3,000 $40.00
Job #812 for the current year required 15 machine hours and 2 inspections. Would this job have been overcosted or undercosted under the traditional system and by how much?
a. undercosted by $36
b. undercosted by $44
c. overcosted by $80
d. undercosted by $80
Even departmental overhead rates will not correctly assign overhead costs in situations where a company has a range of products that differ in volume, lot size, or complexity of production.
In activity-based costing, a separate activity rate (i.e., predetermined overhead rate) is computed for each activity cost pool by dividing the estimated overhead cost in the activity cost pool by the total expected activity for the activity cost pool.