Concept introduction:
Activity Based Costing (ABC):
ABC costing method is generally used to allocate the
Predetermined Overhead allocation rate:
The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.
The formula to calculate the Predetermined Overhead allocation rate is as follows:
To indicate:
The reason for difference in product costs under traditional and ABC method
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Managerial Accounting
- Happy Trails has this information for its manufacturing: Â Its income statement under absorption costing is: Prepare an income statement with variable costing and a reconciliation statement between both methods.arrow_forwardPotterii sells its products to large box stores and recently added a retail line of products to sell directly to consumers. These estimates are to be used in determining the overhead allocation rate for ABC: What would be the predetermined rate for each cost pool?arrow_forwardLean manufacturing uses value streams to produce a family of products that require the same manufacturing sequence. Value-stream costing is an approach often used to determine the unit product costs in a lean manufacturing environment. Which of the following best describes how unit costs are calculated using value-stream costing? a. Value stream costs divided by units shipped b. Value stream costs divided by units produced c. (Total prime costs + overhead costs assigned to the value stream using a plantwide rate) divided by units produced d. Activity-based costing assignments within the value streamarrow_forward
- Explain how a plantwide overhead rate, using a unit-based driver, can produce distorted product costs. In your answer, identify two major factors that impair the ability of plantwide rates to assign cost accurately.arrow_forwardElectan Company produces two types of printers. The company uses ABC, and all activity drivers are duration drivers. Electan Company is considering using DBC and has gathered the following data to help with its decision. A. Activities with duration drivers: B. Activities with consumption ratios and costs: C. Products with cycle time and practical capacity: Required: 1. Using cycle time and practical capacity for each product, calculate the total time for all primary activities. Comment on the relationship to ABC. 2. Calculate the overhead rate that DBC uses to assign costs. Comment on the relationship to a unit-based plantwide overhead rate. 3. Use the overhead rate calculated in Requirement 2 to calculate (a) the overhead cost per unit for each product, and (b) the total overhead assigned to each product. How does this compare to the ABC assignments shown in Part B of the Information set? 4. What if the units actually produced were 10,000 for Printer A and 18,000 for Printer B. Using DBC, calculate the cost of unused capacity.arrow_forwardActivity-based costing is preferable in a system: when multiple products have similar product volumes and costs with a large direct labor cost as a percentage of the total product cost with multiple, diverse products where management needs to support an increase in sales pricearrow_forward
- Can a company gather information for both variable and absorption costing systems?arrow_forwardWhich is not a task typically associated with ABC systems? A. calculating the overhead application rate for each cost pool B. applying a single cost rate C. identifying a cost driver D. more correctly allocating overhead costsarrow_forwardWhich is not a step In activity-based costing? A. identify the activities performed by the organization B. identify the cost driver(s) associated with each activity C. compute a cost rate per production D. assign costs to products by multiplying the cost driver rate by the volume of the cost driver units consumed by the productarrow_forward
- Which of the following is not a step involved in activity-based costing? Select one O a Compute a cost rate per cost driver unit or transaction. O bidentify the activities that consume resources and assign costs to those activities -O CAssign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product o d Determine how to reduce the costs of making products by cutting activitiesarrow_forwardPlease explain the statement below (T/F) thoroughly with examples illustrating the answer. "To compute a product’s profit or product margin, the product’s sales and direct costs are needed in addition to the overhead costs computed in an activity-based costing system."arrow_forwardWhy would a business that uses traditional costing systems consider implementing activity-based costing? Discuss the following in your answer: Problems with traditional costing systems in a modern manufacturing environment. Whether the benefits of activity-based costing always outweigh the costs.arrow_forward
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