Instructions for Part 4 (Chapter 17) (a) For each of these cost pools, what woul
ID: 2544252 • Letter: I
Question
Instructions for Part 4 (Chapter 17) (a) For each of these cost pools, what would be the likely activity cost driver? (b) Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for your company. c) (1) The results of ABC can provide a more accurate picture of costs. Discuss the value of your company using this system to determine overhead costs. (2) How might using ABC affect the decision making at your company?Explanation / Answer
Solution a:
Solution b:
Solution c:
The result of ABC provide most accurate picture of cost rather than allocation of overhead using plant wide overhead rate. The reason is that, ABC allocate cost to product on the basis of effort undertaken in each activity with their relevant activity cost. However in Plant overhead rate, overhead is allocated to product on the basis of single cost driver. This will result in allocation of cost on single basis though different activity across product may vary in different proportion, thus inaccurate result of cost.
Activity based costing is costly approach and complex activity however it provides accurate results of cost and help organization to determine price of product to compete in competitive market.
Likely Activity Cost Driver Cost Pools Likely Activity Cost Driver Assembling Number of units assembled Payroll Nos of employees Billing Nos of sales order/inovices Plant Supervision Machine hours Digging Trenches Square feet digging Purchasing materials Nos of Purchase order Machine maintenance Machine hours Selling Nos of sales order / Sales units Machine Setups Nos of setups Testing Nos units tested Molding Nos of molds Welding Nos of welds Packaging Nos of units