Sometimes a single predetermined overhead rate causes costs to be misallocated. Imagine you are renting an apartment with three friends. The rent is $600 per month, cable is $150 per month, and groceries are $450 per month. You decide to take the $1,200 cost and divide it evenly by the four of you. That would be $300 each. After a few months, you and your friends become annoyed with this scenario. You don’t watch TV so you don’t think it’s fair you have to pay for cable. One of your friends rarely eats at home so he thinks it is unfair to pay for groceries. Clearly, the $300 per person rate is not working. You feel that too much of the cost of cable is being allocated to you and your friend feels that too much of the cost of groceries is being allocated to him. Your other two roommates are underpaying for the resources that they are consuming. There needs to be a better way and there is. In managerial accounting, rather than using one overhead rate to allocate all of the overhead costs, we can break up overhead costs by department. By using departmental overhead rates, we have the flexibility to use a different activity or cost driver for each department. Some departments rely heavily on manual labor but other departments rely heavily on machinery. Direct labor hours might been a good indicator of cost in some departments but machine hours might work better for others. The process for calculating the rates is exactly the same as when we calculated predetermined overhead rates. The only difference here is that it is important to pay attention to which driver is being used in each department. Because you are working with multiple drivers, it is really important to label your rates here. If you do a calculation based on machine hours label your rate as $x/MH. That tells you that the rate is dollars per machine hour. That way when you go to apply the rates, you’ll know to use machine hours and not something else. When calculating and departmental overhead rates: 1. Calculate the rate for each department using the correct driver: Departmental overhead rate = Estimated overhead for the department / Estimated activity for the department 2. Label the rate so you know which activity you used to calculate each rate. 3. Apply overhead to jobs or activities using the rate for each department and the actual activity: Applied overhead for each department = Departmental overhead rate x Actual activity (using the same driver used to calculate the rate) If you used estimated machine hours to calculate the rate, use actual machine hours. If you used direct labor hours to calculate the rate, use actual direct labor hours. 4. Add up the overhead from each department to calculate the total overhead applied. The related video shows an example problem and the calculations required. It also shows how plantwide overhead rates can skew the numbers. Related VideoCalculating and Applying Departmental Overhead Rates Review for test # 2 chapters 4, 6-7. Separate manufacturing overhead rates for each department: indirect products costs, allocated, assigning, or charging. Total estimated departmental overhead cost pool / total estimated amount of the departmental allocation base. Calculating the total amount of manufacturing overhead to allocate to a particular job with departmental overhead rates: Multiply each departmental overhead rate (see above) by the actual amount of the departmental allocation based used by the job; and then add together the allocated amounts from each department. Hierarchy of costs (examples): unit-level, batch-level, product-level facility-level. Activity-based costing: what is it, compute the activity allocation rate, compute the allocated overhead, best cost drivers. How do they behave: variable costs (total and per unit, fixed costs (total and per unit, mixed costs, examples of each. Cost estimation: account analysis, scatter-graph, high low method, compute variable cost per unit, compute total fixed costs, create cost equation, regression analysis. The Laramie factory runs two departments: the Preparation Department and the Processing Department. The departmental overhead cost pool for the Preparation Department was $25,000 and was $20,000 for the Processing Department. The total amount of departmental allocation base was 400 DL hours in the Preparation Department and 600 DL hours in the Processing Department. What is the estimated departmental overhead cost pool for each department? ANSWER INCORRECT · $2.50 for the Processing Department and $2.00 for the Preparation Department · THE CORRECT ANSWER $62.50 for the Preparation Department and $33.33 for the Processing Department · YOU WERE SURE AND INCORRECT $625.00 for the Processing Department and $333.33 for the Preparation Department · $6.25 for the Processing Department and $3.33 for the Preparation Department · I DON'T KNOW YET Dobles Corporation has provided the following data from its activity-based costing system:
The company makes 420 units of product D28K a year, requiring a total of 460 machine-hours, 80 orders, and 10 inspection-hours per year. The product's direct materials cost is $48.96 per unit, and its direct labor cost is $25.36 per unit. Use activity-based costing to compute the unit product cost of product D28K. ANSWER INCORRECT · $93.60 per unit · $89.93 per unit · YOU WERE SURE AND INCORRECT $74.32 per unit · THE CORRECT ANSWER $95.34 per unit · I DON'T KNOW YET Setting up a machine to change from producing one product to another is an example of a ________. ANSWER INCORRECT · THE CORRECT ANSWER batch-level cost · product-level cost · YOU WERE SURE AND INCORRECT unit-level cost · facility-level cost · I DON'T KNOW YET Which of the following is NOT a characteristic of 5S Workplace Organizations? ANSWER INCORRECT · Managers eliminate infrequently used tools and supplies out of the workplace. · THE CORRECT ANSWER Mangers store infrequently used tools and supplies to avoid purchasing tools later. · YOU WERE SURE AND INCORRECT Managers use visual management tools, such as color-coding, to create logical orders of tools, supplies, and equipment. · Managers ensure all equipment and tools are thoroughly cleaned. · I DON'T KNOW YET An important concern in forming a cost pool is to ________. ANSWER INCORRECT · limit the number of costs that make up the pool · THE CORRECT ANSWER ensure the costs in the cost pool are homogenous with respect to the cost driver · YOU WERE SURE AND INCORRECT add as much cost as possible to the cost pool · avoid placing similar costs in the same pool · I DON'T KNOW YET Computer World, Inc. manufactures computer parts and keyboards. The annual production and sales of computer parts is 1,000 units, while 1,200 keyboards are produced and sold. The company has traditionally used direct-labor hours to allocate its overhead to products. Computer parts require 3 direct labor hours per unit, while keyboards require 2.5 direct labor hours per unit. The total estimated overhead for the period is $114,000. The company is looking at the possibility of changing to an activity-based costing system for its products. What is the predetermined overhead allocation rate using the traditional costing system? ANSWER INCORRECT · $27.24 · YOU WERE SURE AND INCORRECT $30.92 · THE CORRECT ANSWER $19 · $12.09 · I DON'T KNOW YET Which of the following is NOT one of the eight wastes that comprise much of the waste found in traditional organizations, including service and merchandising companies? ANSWER INCORRECT · Moving materials within the plant · Adding features customers never use · YOU WERE SURE AND INCORRECT Storing inventory · THE CORRECT ANSWER Overutilizing employees · I DON'T KNOW YET Which of the following provides an example of a conformance cost? ANSWER INCORRECT · Warranty cost · THE CORRECT ANSWER Inspection cost · Rework costs · YOU WERE SURE AND INCORRECT Maintenance costs · I DON'T KNOW YET Testing a prototype of a new product is an example of a ________. ANSWER INCORRECT · THE CORRECT ANSWER product-level cost · unit-level cost · YOU WERE SURE AND INCORRECT facility-level cost · batch-level cost · I DON'T KNOW YET Whiteley Inc. manufactures and sells two products: Product M5 and Product P4. Data concerning the expected production of each product and the expected total direct labor hours (DLH) required to produce that output appear below:
The unit product cost of Product P4 under activity-based costing is closest to ___________. ANSWER INCORRECT · $3,716.76 per unit · $3,648.00 per unit · YOU WERE SURE AND INCORRECT $3,135.65 per unit · THE CORRECT ANSWER $4,226.79 per unit · I DON'T KNOW YET Which of the following is NOT true regarding total quality management (TQM) programs? ANSWER INCORRECT · TQM programs measure the number of customer complaints. · YOU WERE SURE AND INCORRECT TQM programs measure defect rates. · THE CORRECT ANSWER TQM programs never emphasize nonfinancial measures. · TQM programs emphasize the number of warranty repairs. · I DON'T KNOW YET If a manager determines an existing cost system is outdated, the manager should consider implementing ________. ANSWER INCORRECT · THE CORRECT ANSWER activity-based costing · no new accounting systems · YOU WERE SURE AND INCORRECT fewer cost-cutting practices · less new technology · I DON'T KNOW YET In the cost allocation process, an allocation base ________. ANSWER INCORRECT · using bar coding and other technological advances is discouraged since data collection is inconsistent · YOU WERE SURE AND INCORRECT usage collection is discouraged since it is never related to the allocation base · THE CORRECT ANSWER should be the cost driver of the costs in the particular activity pool · is never a concern since managers never track activity pools · I DON'T KNOW YET Which is NOT an example of a product-level cost? ANSWER INCORRECT · Design time · THE CORRECT ANSWER Setup time · YOU WERE SURE AND INCORRECT Parts administration · Research & development · I DON'T KNOW YET A relevant facility-level cost driver for heating costs is ________. ANSWER INCORRECT · the lease payments on sole-purpose use manufacturing equipment · YOU WERE SURE AND INCORRECT the costs to set up the machine · the inspection units of production · THE CORRECT ANSWER floor space · I DON'T KNOW YET Selecting an allocation base for each activity and estimating the total annual cost ________. ANSWER INCORRECT · is the fourth step to compute and use activity cost allocation rates · THE CORRECT ANSWER is the second step to compute and use activity cost allocation rates · YOU WERE SURE AND INCORRECT is the first step to compute and use activity cost allocation rates · is the third step to compute and use activity cost allocation rates · I DON'T KNOW YET An important concern in forming a cost pool is to ________. ANSWER INCORRECT · avoid placing similar costs in the same pool · add as much cost as possible to the cost pool · YOU WERE SURE AND INCORRECT limit the number of costs that make up the pool · THE CORRECT ANSWER ensure the costs in the cost pool are homogenous with respect to the cost driver · I DON'T KNOW YET Excessive cost and time required to implement and maintain is characteristic of ________. ANSWER INCORRECT · job order costing · THE CORRECT ANSWER activity-based costing (ABC) · YOU WERE SURE AND INCORRECT process costing · operational cost systems · I DON'T KNOW YET Which of the following is a benefit of employee empowerment? ANSWER INCORRECT · Lean companies focus on employees working in production cells; therefore, an employee may only complete one task. · THE CORRECT ANSWER Lean companies typically focus on employee empowerment to combat waste. · YOU WERE SURE AND INCORRECT Lean companies empower employees by using large teams to identify waste and abuse. · Lean companies focus on smaller employee roles than employees at other companies. · I DON'T KNOW YET Which of the following is NOT a characteristic of 5S Workplace Organizations? ANSWER INCORRECT · Managers eliminate infrequently used tools and supplies out of the workplace. · THE CORRECT ANSWER Mangers store infrequently used tools and supplies to avoid purchasing tools later. · YOU WERE SURE AND INCORRECT Managers use visual management tools, such as color-coding, to create logical orders of tools, supplies, and equipment. · Managers ensure all equipment and tools are thoroughly cleaned. · I DON'T KNOW YET The cost driver of the costs in the particular activity pool is ________. ANSWER INCORRECT · THE CORRECT ANSWER the cost allocation base · the costs using direct labor hours as the allocation base · YOU WERE SURE AND INCORRECT the costs using direct material costs · the cost of supervisory expense · I DON'T KNOW YET Which of the following choices represent conformance costs? ANSWER INCORRECT · THE CORRECT ANSWER Appraisal and prevention costs · Prevention and external failure costs · YOU WERE SURE AND INCORRECT Appraisal and internal failure costs · Internal and external failure costs · I DON'T KNOW YET The first step in the development of an activity-based costing system is to ________. ANSWER incorrect · identify activity cost pools · allocates manufacturing overhead · YOU WERE SURE AND INCORRECT select the allocation base and estimate total amounts · compute activity cost allocation rates · I DON'T KNOW YET Which of the following situations indicate that a manager should consider using activity-based costing (ABC)? ANSWER incorrect · Older systems continue to operate at consistent levels of accuracy. · The cost system is outdated. · YOU WERE SURE AND INCORRECT The costs of implementing activity-based costing (ABC) exceeds the expected benefits. · The existing cost systems do not distort costs. · I DON'T KNOW YET The first step in the development of an activity-based costing system is to ________. ANSWER INCORRECT · THE CORRECT ANSWER identify activity cost pools · allocates manufacturing overhead · YOU WERE SURE AND INCORRECT select the allocation base and estimate total amounts · compute activity cost allocation rates · I DON'T KNOW YET Which of the following situations indicate that a manager should consider using activity-based costing (ABC)? ANSWER INCORRECT · Older systems continue to operate at consistent levels of accuracy. · THE CORRECT ANSWER The cost system is outdated. · YOU WERE SURE AND INCORRECT The costs of implementing activity-based costing (ABC) exceeds the expected benefits. · The existing cost systems do not distort costs. · I DON'T KNOW YET Which of the following is a characteristic of 5S Workplace Organizations? ANSWER YOU CHOSE TWO · Managers NEVER use visual management tools, such as color-coding, to create logical orders of tools, supplies, and equipment. · YOU WERE UNSURE AND INCORRECT Managers do not need to inspect employee workstations because managers have faith and trust in employees. · YOU WERE UNSURE AND CORRECT Managers eliminate infrequently used tools and supplies out of the workplace. · Mangers store infrequently used tools and supplies to avoid purchasing tools later. I DON'T KNOW YET Which of the following eights wastes signifies unsafe work conditions that may decrease employee morale and increase the firm’s workers’ compensation claims? ANSWER YOU CHOSE TWO · Waiting · Inventory · YOU WERE UNSURE AND CORRECT Movement · YOU WERE UNSURE AND INCORRECT Transportation · I DON'T KNOW YET Which of the following would be the best cost driver to assemble a cost pool? ANSWER INCORRECT · THE CORRECT ANSWER Number of parts · Amount of square footage of the manufacturing floor · Number of orders · YOU WERE SURE AND INCORRECT Number of product lines · I DON'T KNOW YET Johnson Enterprises uses departmental overhead rates to allocate manufacturing overhead to jobs. The company has two divisions: Production and Assembling. The Production Division uses a departmental overhead rate of $40 per machine hour, while the Assembling Division uses a departmental overhead rate of $25 per direct labor hour. Job 757 used the following direct-labor hours and machine hours in each division.
How much manufacturing overhead would be allocated to Job 757 using the departmental overhead rates? ANSWER YOU CHOSE TWO · $525 · YOU WERE UNSURE AND INCORRECT $205 · YOU WERE UNSURE AND CORRECT $655 · $44 · I DON'T KNOW YET Quality at the source ________. ANSWER I DON'T KNOW YET · THE CORRECT ANSWER is the term that refers to shifting the responsibility for quality adherence to the operators at each step in the value stream, rather than relying on supervisors or quality control experts to discover errors · refers to the exchange of information with suppliers and customers to reduce costs, improve quality, and speed delivery of goods and services from suppliers to company, focusing on customers · is the goal of producing near perfection, with less than 3.4 defects per million opportunities · is a system in which production costs are not assigned to units until they are finished or sold. As a result, managers save bookkeeping steps of moving products through various types of inventory accounts Which of the following statements is TRUE regarding total quality management (TQM) programs? ANSWER INCORRECT · YOU WERE UNSURE AND INCORRECT A manager would not include the number of customer complaints in a TQM program. · TQM programs fail to measure defect rates. · THE CORRECT ANSWER TQM programs emphasize nonfinancial measures. · YOU WERE UNSURE AND INCORRECT A manager would not include warranty repairs in a TQM programs. · I DON'T KNOW YET ________ is the term that refers to shifting the responsibility for quality adherence to the operators at each step in the value stream instead of relying on supervisors or quality control experts to discover errors. ANSWER INCORRECT · THE CORRECT ANSWER Quality at the source · YOU WERE UNSURE AND INCORRECT Supply-chain management · Backflush costing · YOU WERE UNSURE AND INCORRECT Six Sigma · I DON'T KNOW YET Laramie produces two products: Basic and Deluxe. The plant’s overhead for January was $45,000 and the plant used 600 durect labor (DL) hours. The factory has two departments: Preparation and Processing. The Preparation Department incurred $25,000 of overhead and used 400 DL hours. In the Processing Department, $20,000 of manufacturing overhead was incurred and 160 DL hours were used. During January, 300 DL hours were used by the Basic model and 300 DL hours were used by the Deluxe model to make 100 units of each. What is the total overhead rate if Laramie uses departmental rates based on DL hours (DLH)? ANSWER YOU CHOSE TWO · $125/DLH for preparation and $62.50/DLH for processing · YOU WERE UNSURE AND INCORRECT $80.35/DLH for preparation and $80.35/DLH for processing · $75/DLH for both departments · YOU WERE UNSURE AND CORRECT $62.50/DLH for preparation and $125/DLH for processing · I DON'T KNOW YET |
How much manufacturing overhead would be allocated to job 757 using the departmental overhead rates?
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