Learning Objective 04-P3: Allocate overhead costs using activity-based costing. In activity-based costing, the costs of related activities are collected and then pooled in some logical manner into activity cost pools

 Learning Objective 04-P3: Allocate overhead costs using activity-based costing.

In activity-based costing, the costs of related activities are collected and then pooled in some logical manner into activity cost pools. After all activity costs have been accumulated in an activity cost pool account, cost objects are assigned a portion of the total activity cost using a cost driver (allocation base).

 Knowledge Check 01
 
In step _____ in activity-based costing, overhead costs are allocated to cost objects.
 
multiple choice

    one
    two
    three Correct

Explanation

Knowledge Check 01
 
The third step is to allocate overhead costs to cost objects.

An activity cost driver is a factor that causes:
 
multiple choice

    an activity to go up or down.
    the cost of an activity to go up or down. Correct
    company’s overall costs to go up or down.
    group of costs that are related to the same activity to go up or down.

Explanation

Knowledge Check 01
 
An activity cost pool is a group of costs that are related to the same activity. An activity cost driver is a factor that causes the cost of an activity to go up or down.
 

Step 2 of ABC costing is to:
 
multiple choice

    identify activities and their budgeted overhead cost.
    compute activity overhead rate for each activity. Correct
    allocate overhead cost to cost objects.

Explanation

Knowledge Check 01
 
Step 1 is identify activities and their budgeted overhead cost. Step 2 is to compute activity overhead rate for each activity. Step 3 is to allocate overhead cost to cost objects.
 

 
In step 3 of ABC, overhead cost is allocated to activities based on the following formula:
 
multiple choice

    actual activity usage divided by activity rate
    actual activity usage times activity rate
    budgeted activity usage divided by budgeted activity rate
    actual activity usage times budgeted activity rate Correct

Explanation

Knowledge Check 01

Step 3 allocates overhead costs to cost objects based on the following formula: actual activity usage times the activity rate.
 

The plantwide rate method, compared to activity-based costing can _____.

multiple choice

    Overcost low-volume complex products
    Undercost low-volume complex products Correct
    Will always lead to the best product pricing decision

Explanation

Knowledge Check 01

A single plantwide rate does not capture the products’ different use of these activities and often distorts product costs. With the plantwide rate method, low-volume complex products are undercosted, and high-volume simpler products are overcosted. Using the plantwide rate method sometimes can lead to bad product pricing and product mix decisions.
 

Thanks