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Questions and Answers
The departmental overhead rate method is used to allocate overhead costs based on the ______ of each department.
The departmental overhead rate method is used to allocate overhead costs based on the ______ of each department.
activities
What is the first step in the departmental overhead rate method?
What is the first step in the departmental overhead rate method?
- Determine the total overhead costs for the period.
- Allocate overhead costs to products.
- Identify the cost drivers for each department. (correct)
- Calculate the overhead rate for each department.
The departmental overhead rate method assumes that all departments have the same overhead rate.
The departmental overhead rate method assumes that all departments have the same overhead rate.
False (B)
Match the following steps to the departmental overhead rate method:
Match the following steps to the departmental overhead rate method:
What is the purpose of calculating departmental overhead rates?
What is the purpose of calculating departmental overhead rates?
Which of the following is NOT a benefit of using the departmental overhead rate method?
Which of the following is NOT a benefit of using the departmental overhead rate method?
The departmental overhead rate method is always the most accurate method for allocating overhead costs.
The departmental overhead rate method is always the most accurate method for allocating overhead costs.
Which of the following is NOT a strength of the plantwide overhead rate method?
Which of the following is NOT a strength of the plantwide overhead rate method?
The departmental overhead rate method is a more complex approach to allocating overhead costs compared to the plantwide overhead rate method.
The departmental overhead rate method is a more complex approach to allocating overhead costs compared to the plantwide overhead rate method.
What is a common weakness associated with both the plantwide and departmental overhead rate methods?
What is a common weakness associated with both the plantwide and departmental overhead rate methods?
The ______ overhead rate method uses a single overhead rate for the entire company.
The ______ overhead rate method uses a single overhead rate for the entire company.
Match the following terms with their definitions:
Match the following terms with their definitions:
Which method is generally considered more accurate in allocating overhead costs to individual departments?
Which method is generally considered more accurate in allocating overhead costs to individual departments?
The plantwide overhead rate method is often simpler to implement than the departmental overhead rate method.
The plantwide overhead rate method is often simpler to implement than the departmental overhead rate method.
What is a common cost driver used in both plantwide and departmental overhead rate methods?
What is a common cost driver used in both plantwide and departmental overhead rate methods?
The ______ overhead rate method is often used in external reporting because it complies with GAAP.
The ______ overhead rate method is often used in external reporting because it complies with GAAP.
The plantwide overhead rate method allocates overhead costs based on:
The plantwide overhead rate method allocates overhead costs based on:
Which of the following is an assumption of the plantwide overhead rate method?
Which of the following is an assumption of the plantwide overhead rate method?
The departmental overhead rate method uses a single activity base for the entire company.
The departmental overhead rate method uses a single activity base for the entire company.
The departmental overhead rate method is more accurate than the plantwide overhead rate method when products are diverse.
The departmental overhead rate method is more accurate than the plantwide overhead rate method when products are diverse.
What are the two main methods for allocating overhead costs?
What are the two main methods for allocating overhead costs?
What is the main difference between the plantwide overhead rate method and the departmental overhead rate method?
What is the main difference between the plantwide overhead rate method and the departmental overhead rate method?
The plantwide overhead rate method is considered a ______ approach to allocating overhead costs.
The plantwide overhead rate method is considered a ______ approach to allocating overhead costs.
Activity-based costing (ABC) focuses on ______ and follows three steps to allocate overhead costs.
Activity-based costing (ABC) focuses on ______ and follows three steps to allocate overhead costs.
Match the following terms with their corresponding descriptions:
Match the following terms with their corresponding descriptions:
Which of the following is NOT one of the three steps in activity-based costing?
Which of the following is NOT one of the three steps in activity-based costing?
Match the following overhead allocation methods with their descriptions:
Match the following overhead allocation methods with their descriptions:
Activity-based costing (ABC) is a more complex method than the plantwide overhead rate method.
Activity-based costing (ABC) is a more complex method than the plantwide overhead rate method.
What are the advantages of using activity-based costing (ABC)?
What are the advantages of using activity-based costing (ABC)?
The first step in applying activity-based costing is to ______ and their budgeted overhead cost.
The first step in applying activity-based costing is to ______ and their budgeted overhead cost.
Flashcards
Plantwide Overhead Rate
Plantwide Overhead Rate
A single overhead rate used to allocate costs across all products in a plant.
Allocation of Overhead Costs
Allocation of Overhead Costs
The process of distributing indirect costs to different products or departments.
Departmental Overhead Rate
Departmental Overhead Rate
An overhead rate assigned to each department based on its specific costs.
Cost Driver
Cost Driver
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KartCo Example
KartCo Example
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Step 1 in Departmental Overhead Rate Method
Step 1 in Departmental Overhead Rate Method
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Step 2 in Departmental Overhead Rate Method
Step 2 in Departmental Overhead Rate Method
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Step 3 in Departmental Overhead Rate Method
Step 3 in Departmental Overhead Rate Method
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Allocating Overhead Costs
Allocating Overhead Costs
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Overhead Costs
Overhead Costs
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Product Cost
Product Cost
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Overhead Cost Allocation
Overhead Cost Allocation
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Strengths of Plantwide Method
Strengths of Plantwide Method
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Weakness of Plantwide Method
Weakness of Plantwide Method
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Strengths of Departmental Method
Strengths of Departmental Method
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Weakness of Departmental Method
Weakness of Departmental Method
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GAAP
GAAP
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Direct Labor Hours
Direct Labor Hours
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Plantwide Overhead Rate Method
Plantwide Overhead Rate Method
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Departmental Overhead Rate Method
Departmental Overhead Rate Method
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Activity-Based Costing (ABC)
Activity-Based Costing (ABC)
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Cost Pools
Cost Pools
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Overhead Activity Rate
Overhead Activity Rate
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Identify Activities
Identify Activities
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Assign Costs
Assign Costs
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Allocate Overhead Costs
Allocate Overhead Costs
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Study Notes
Activity-Based Costing and Analysis
- Activity-based costing (ABC) focuses on activities and follows three steps: identifying activities and assigning costs to activity cost pools, computing an overhead activity rate for each activity cost pool, and assigning overhead costs to cost objects (products).
- Overhead costs change with the allocation base.
- All products use overhead in the same proportions.
- Activity-based costing is based on activities and the costs related to the same activity.
- An activity cost driver is a factor that causes the cost of an activity to go up or down.
- ABC also applies to service providers. Service companies must classify costs by activity levels of unit, batch, service, and facility.
- Cost difference is largest using ABC.
- More accurate overhead allocation leads to better product pricing and product mix decisions.
- Plantwide and departmental methods do not capture the different uses of activities by products.
- Low-volume complex products are undercosted using plantwide or departmental methods, while high-volume simpler products are overcosted.
Learning Objective P1: Allocate Overhead Costs Using the Plantwide Overhead Rate Method
- Plantwide overhead rate method uses one overhead rate to allocate overhead costs.
- The cost object is the unit of product.
- Allocation base: direct labor hours or machine hours.
- Total budgeted overhead costs / allocation base equals the overhead rate.
- Same rate used to assign overhead costs to all products.
Learning Objective P2: Allocate Overhead Costs Using the Departmental Overhead Rate Method
- Separate overhead rates are calculated for each department.
- Overhead cost for each department is divided by the cost driver (allocation base) to produce an overhead rate per cost driver for that department.
Learning Objective P3: Allocate Overhead Costs Using Activity-Based Costing
- Overhead costs are assigned in a more thorough way (as opposed to P1 and P2 methods).
- Identify activities and related costs into cost pools.
- Compute an activity rate per cost driver for each activity cost pool by dividing the budgeted activity cost by the budgeted activity usage.
- Assign overhead costs to products using an activity rate.
Learning Objective P4: Allocate Overhead Costs to Service Companies Using Activity-Based Costing
- ABC also applies to service providers. Service companies must classify costs by activity levels of unit, batch, service, and facility.
- Unit level: sell service or product to a single customer.
- Batch level: services done on a batch of work.
- Facility level: general activities for the whole facility.
- Calculate an activity rate for each activity by dividing budgeted activity cost by budgeted activity usage.
Learning Objective C1: Describe the Four Types of Activities That Cause Overhead Costs
- Four types of activities: unit level, batch level, product level, and facility level.
- Unit level activities are performed for each individual unit of product.
- Batch level activities are performed only on batches of products.
- Product level activities are performed for one product line (not individual units or batches).
- Facility level activities sustain the facility capacity as a whole.
Learning Objective A1: Allocate Selling, General, and Administrative Expenses to Products and Assessing Profitability
- Customer profitability report determines the profitability of each customer.
- Calculate customer activity rate by dividing budgeted customer support costs by the budgeted base.
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