1. Determine the formula used to calculate the department-based manufacturing ov
ID: 2534873 • Letter: 1
Question
1. Determine the formula used to calculate the department-based manufacturing overhead rates . ????
2. What are the main costs and limitations of implementing ABC systems?
A. The fact that ABC systems cannot be used for service and merchandising companies is its main limitation.
B. Identifying the five-step decision-making process required to implement an ABC system is very time consuming.
C. The measurements necessary to implement it require many calculations and can be costly to operate.
D. All of the above.
Explanation / Answer
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.
. Calculate the rate for each department using the correct driver:
Departmental overhead rate = Estimated overhead for the department / Estimated activity for the department
2.Activity-based costing is a way to allocate costs based on the amount of resources a product or service consumes. The use of ABC is especially important to businesses that provide customized products or services. A customized production environment requires ABC’s allocation of actual indirect costs to a product to identify its true cost
the answer is D all the above
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