2. Describe what is meant by under- and overapplied overhead. 3. Explain how a p
ID: 2330814 • Letter: 2
Question
2. Describe what is meant by under- and overapplied overhead. 3. 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 4. What are non-unit-related overhead activities? Non-unit-based cost drivers? Give some examples. 5. What is an overhead consumption ratio? 6. Overhead costs are the source of product cost distortions. Do you agree or disagree? Explain. 7. What is activity-based product costing? 8. What are the six steps that define the design of an activity-based costing system? 9. Explain how the cost of resources is assigned to activities. What is meant by the phrase "unbundling the general ledger accounts"? 10. What is a bill of activities? 11. Identify and define two types of activity drivers. 12. What are unit-level activities? Batch-level activities? Product-level activities? Facility-level activities? 13. How does TDABC simplify ABC? 14. Explain why it is easy to update a TDABC model. 15. Describe two ways to reduce a complex ABC system. Of the two ways, which has the most merit?Explanation / Answer
Post the rest in a different question.
2.What is meant by over and under absorbed overheads:
When a company uses standard costing, it derives a standard amount of overhead cost that should be incurred in an accounting period, and applies this standard amount of overhead to cost objects . If the actual amount of overhead turns out to be different from the standard amount of overhead, then the overhead is said to either under absorbed or over absorbed.
If overhead is under absorbed, this means that more actual overhead costs were incurred than expected, with the difference being charged to expense as incurred. This usually means that the recognition of expense is accelerated into the current period, so that the amount of profit recognized declines
If overhead is over absorbed, this means that fewer actual overhead costs were incurred than expected, so that more cost is applied to cost objects than were actually incurred. This means that the recognition of expense is reduced in the current period, which increases profits. For example, if the overhead rate is predetermined to be $20 per direct labor hour consumed, but the actual amount should have been $18 per hour, then the $2 difference is considered to be over absorbed overhead.
3.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
Using only unit-based activity drivers to assign nonunit-related overhead costs can create distorted product costs. Two major factors that impair the ability of unit-based plant-wide and departmental rates to assign overhead costs accurately are the proportion of nonunit-related overhead costs to total overhead costs is large; the degree of product diversity is great.
4.What are the Non unit related overhead activties.Non unit based drivers
These activities that are not performed each time a unit of product is produced.The costs associated with these non unit level activities are unlikley to vary with units produced.However they vary sometimes besides units and identifying factors which are helpful in predicting and managing costs.
Example setting up equipment and reenginerring products.Oftem the same equipment is used to produce different products.Setting up euipment means preparing for a particular type of product being made.A vat may be used to dye t shirts.
5.What is an overhead consumption ratio:
A comparison of operating expenses and total income that is not directly related to the production of a good or service. A firm's operating expenses are expenditures that result from normal, day-to-day business operations. Operating expenses include advertising, office rent, professional fees, utilities, insurance, machinery maintenance, depreciation or plants or machinery, etc.
Overhead Consumption Ratio = Operating Expenses / (taxable net interest income + operating income)
Overhead ratio is a metric that allows companies to evaluate expenses as a percentage of income. A company strives to achieve the lowest operating expenses possible without sacrificing its goods and/or services or competitiveness within the industry. Cutting expenses has a positive effect on the overhead ratio; however, a company must balance these cuts with maintaining the quality of business.
6.overhead costs are the source of product cost distortions
Yes it is agreed that there are distortions in overhead costs.In traditional costing, only production volume related measures are used to allocate overhead costs to products, even though many products do not consume indirect resources (overhead) in proportion to the volume of products produced. Since many types of indirect resource costs are caused by, or driven by, non-production volume related product characteristics such as size and complexity, traditional costing tends to distort product costs. This means that too much overhead cost is allocated to some products, while too little overhead cost is allocated to other products. These distortions are frequently referred to as cross-subsidies. Generally, ABC solves this problem by separating overhead costs into different cost categories referred to as cost pools. Costs that are caused by, or driven by, the same activity are pooled together and then allocated, or traced, to products using an appropriate measure of the activity volume.
7.What is activity based product costing
ABC costing focuses on identifying activities, or production processes, that are used to process a job. These individual activities are grouped together with similar processes into a cost pool that relates to single activity cost driver.
The cost pools are then analyzed and assigned a predetermined overhead rate that will eventually be assigned to individual jobs and products.
Activity-based costing is a much more accurate way of assigning indirect costs. It’s difficult to determine how much electricity or heat one department or job uses over another without some type of methodical allocation process.Activity based costing helps allocate overhead expenses to jobs and products based on the amount of the activities required to produce the product instead of simply estimating how much each job uses.
8.What are the six steps that definethedesign of an activity based costing system
The following are the six steps :
Step #1: Activity Identification:First, activities must be identified and grouped together in activity pools. Activity pools are the supporting activities that tie in to a product line or service These pools or buckets may include fractionally assigned costs of supporting activities to individual products as appropriate during the second step.
Step #2: Activity Analysis:ABC continues with activity analysis, clearly identifying the processes which support a product and avoiding some of the systemic inaccuracies of traditional costing. ABC costing requires activity analysis, similar to the process mapping found in lean manufacturing.
Step #3: Assignment of Costs:Based on the findings of step #1 and #2, costs are assigned to an activity pool. For example, human resources costs would be assigned to indirect administrative or indirect management costs. These pools will each have some contribution to object cost.
Step #4: Calculate Activity Rates:It may include direct labor hours, or indirect support labor. These activities must be assigned a value in real currency. All weightings must be added at this step. For instance, production labor hours should be in terms of a weighted labor rate including benefit costs.
Step #5: Assign Costs to Cost Objects:Once activity costs, pools and rates are identified and clearly defined, the next step is to assign them to cost objects. Objects are generally defined as the results offered to a customer. In both manufacturing and non-manufacturing environments, this product should have some saleable value to compare to the assigned costs.
Step #6: Prepare and Distribute Management Reports:Once ABC costing analysis is complete, that cost data should be placed in a concise and coherent manner for cost object and process owners. This communication of the costing analysis is critical to justify the cost of the analysis, as often this is not an inconsequential cost.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.