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Business Accounting Horngren's Accounting, The Financial Chapters (12th Edition)

Predetermined Overhead allocation rate: The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. The formula to calculate the Predetermined Overhead allocation rate is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e 1. Total Indirect Cost To determine: The indirect cost allocated to both the products, i.e., commercial containers and travel packs using single plant wide overhead allocation method. Later, the indirect cost per unit needs to be computed. Solution: The Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Total Indirect Cost or Allocated Overhead $ 274,400 $ 71,400 Indirect Cost per unit $ 98 $ 1.40 Explanation: The Calculation of Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Machine Hours (A) 1960 510 Single Plant wide overhead allocation rate (B) $ 140 $ 140 Allocated Overhead (C) = A*B = $ 274,400 $ 71,400 Units Produced (D) 2800 51000 Indirect Cost per unit (C/D) $ 98 $ 1.40 Total Indirect Cost or Allocated Overhead is calculated by multiplying the Machine Hours with Single Plant wide overhead allocation rate. Indirect Cost per unit is calculated by dividing the Total Indirect Cost or Allocated Overhead by unit produced. Conclusion: Hence, Single plant wide overhead allocation is used to calculate the indirect cost for each product. 2. Predetermined Overhead allocation rate To determine: The Predetermined Overhead allocation rate for each activity. Solution: The Predetermined Overhead allocation rate for each activity is as follows: Activity Predetermined Overhead allocation rate Material Handling $ 4 per kilo Packaging $ 70 per machine hours Quality Assurance $ 60 per samples Explanation: Formula used: The formula used to calculate the Predetermined Overhead allocation rate for each activity is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. The Calculation of the Predetermined Overhead allocation rate for each activity is explained as follows: Activity Total Estimated Overhead Cost Total Estimated Allocation base Predetermined Overhead allocation rate A B =A/B Material Handling $ 96,000 24000 killos $ 4 per kilo Packaging $ 210,000 3000 machine hours $ 70 per machine hours Quality Assurance $ 114,000 1900 Samples $ 60 per samples Conclusion: Hence, the Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. 3. Activity based cost per unit To determine: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity. Solution: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is as follows: Commercial Containers Travel Packs Activity based cost per unit $ 75.00 $ 2.00 Explanation: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is explained as follows: First the calculation of Total Activity based cost for each product is done as follows: Calculation of Total Activity based cost: Commercial Containers Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total Activity based Overhead Cost A B =A*B Material Handling 9800 killos $ 4 $ 39,200 Packaging 1960 machine hours $ 70 $ 137,200 Quality Assurance 560 Samples $ 60 $ 33,600 Total Activity based Overhead Cost $ 210,000 Travel Packs Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total allocated Overhead Cost A B =A*B Material Handling 5100 killos $ 4 $ 20,400 Packaging 510 machine hours $ 70 $ 35,700 Quality Assurance 765 Samples $ 60 $ 45,900 Total Activity based Overhead Cost $ 102,000 Now the Calculation of Activity based cost per unit is as follows: Calculation of Activity based cost per unit: Commercial Containers Travel Packs Total Activity based Overhead Cost (A) $ 210,000 $ 102,000 Units Produced (B) 2800 51000 Activity based cost per unit = A/B = $ 75.00 $ 2.00 Conclusion: Hence, Activity based cost per unit for Commercial Containers is $75 and for Travel Packs is $2. 4. Comparison Activity based cost per unit To explain: Comparison between per unit cost computed using activity-based costing method and single plant wide overhead allocation method along with the nature and reason for such change. Solution: The comparison Activity based cost per unit under both methods is as follows: Single Plant wide overhead allocation method Activity Based method Commercial Containers $ 98.00 $ 75.00 Travel Packs $ 1.40 $ 2.00 Explanation: The per unit cost for ‘commercial containers’ is lower when considering activity-based costing method i.e. $75 per unit while it is lower using single plant wide overhead allocation method for ‘travel packs’ i.e. $1.4 per unit. % change in costs for commercial containers = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 2 ) × 100 % change in costs for commercial containers = { $98 - $75 } $75 × 100 % change in costs for commercial containers = $23 $75 × 100 % change in costs for commercial containers = 30 .67% % change in costs for travel packs = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 1 ) × 100 % change in costs for travel packs = ( $2 - $1 .4 ) $1 .4 × 100 % change in costs for travel packs = $0 .6 $1 .4 × 100 % change in costs for travel packs = 42 .86% This clearly means that the difference in per unit cost between both the methods was more for travel packs when compared to commercial containers. Reason for difference in per unit cost: Single plant wide overhead allocation method is applied for the whole indirect manufacturing cost at once and it ignores the different activities of the manufacturing. The activity based overhead allocation rate is calculated separately for each activity and accordingly the indirect costs are allocated to the products. Conclusion: Hence, cost allocated under both methods are different.

Predetermined Overhead allocation rate: The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. The formula to calculate the Predetermined Overhead allocation rate is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e 1. Total Indirect Cost To determine: The indirect cost allocated to both the products, i.e., commercial containers and travel packs using single plant wide overhead allocation method. Later, the indirect cost per unit needs to be computed. Solution: The Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Total Indirect Cost or Allocated Overhead $ 274,400 $ 71,400 Indirect Cost per unit $ 98 $ 1.40 Explanation: The Calculation of Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Machine Hours (A) 1960 510 Single Plant wide overhead allocation rate (B) $ 140 $ 140 Allocated Overhead (C) = AB = $ 274,400 $ 71,400 Units Produced (D) 2800 51000 Indirect Cost per unit (C/D) $ 98 $ 1.40 Total Indirect Cost or Allocated Overhead is calculated by multiplying the Machine Hours with Single Plant wide overhead allocation rate. Indirect Cost per unit is calculated by dividing the Total Indirect Cost or Allocated Overhead by unit produced. Conclusion: Hence, Single plant wide overhead allocation is used to calculate the indirect cost for each product. 2. Predetermined Overhead allocation rate To determine: The Predetermined Overhead allocation rate for each activity. Solution: The Predetermined Overhead allocation rate for each activity is as follows: Activity Predetermined Overhead allocation rate Material Handling $ 4 per kilo Packaging $ 70 per machine hours Quality Assurance $ 60 per samples Explanation: Formula used: The formula used to calculate the Predetermined Overhead allocation rate for each activity is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. The Calculation of the Predetermined Overhead allocation rate for each activity is explained as follows: Activity Total Estimated Overhead Cost Total Estimated Allocation base Predetermined Overhead allocation rate A B =A/B Material Handling $ 96,000 24000 killos $ 4 per kilo Packaging $ 210,000 3000 machine hours $ 70 per machine hours Quality Assurance $ 114,000 1900 Samples $ 60 per samples Conclusion: Hence, the Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. 3. Activity based cost per unit To determine: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity. Solution: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is as follows: Commercial Containers Travel Packs Activity based cost per unit $ 75.00 $ 2.00 Explanation: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is explained as follows: First the calculation of Total Activity based cost for each product is done as follows: Calculation of Total Activity based cost: Commercial Containers Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total Activity based Overhead Cost A B =AB Material Handling 9800 killos $ 4 $ 39,200 Packaging 1960 machine hours $ 70 $ 137,200 Quality Assurance 560 Samples $ 60 $ 33,600 Total Activity based Overhead Cost $ 210,000 Travel Packs Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total allocated Overhead Cost A B =A*B Material Handling 5100 killos $ 4 $ 20,400 Packaging 510 machine hours $ 70 $ 35,700 Quality Assurance 765 Samples $ 60 $ 45,900 Total Activity based Overhead Cost $ 102,000 Now the Calculation of Activity based cost per unit is as follows: Calculation of Activity based cost per unit: Commercial Containers Travel Packs Total Activity based Overhead Cost (A) $ 210,000 $ 102,000 Units Produced (B) 2800 51000 Activity based cost per unit = A/B = $ 75.00 $ 2.00 Conclusion: Hence, Activity based cost per unit for Commercial Containers is $75 and for Travel Packs is $2. 4. Comparison Activity based cost per unit To explain: Comparison between per unit cost computed using activity-based costing method and single plant wide overhead allocation method along with the nature and reason for such change. Solution: The comparison Activity based cost per unit under both methods is as follows: Single Plant wide overhead allocation method Activity Based method Commercial Containers $ 98.00 $ 75.00 Travel Packs $ 1.40 $ 2.00 Explanation: The per unit cost for ‘commercial containers’ is lower when considering activity-based costing method i.e. $75 per unit while it is lower using single plant wide overhead allocation method for ‘travel packs’ i.e. $1.4 per unit. % change in costs for commercial containers = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 2 ) × 100 % change in costs for commercial containers = { $98 - $75 } $75 × 100 % change in costs for commercial containers = $23 $75 × 100 % change in costs for commercial containers = 30 .67% % change in costs for travel packs = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 1 ) × 100 % change in costs for travel packs = ( $2 - $1 .4 ) $1 .4 × 100 % change in costs for travel packs = $0 .6 $1 .4 × 100 % change in costs for travel packs = 42 .86% This clearly means that the difference in per unit cost between both the methods was more for travel packs when compared to commercial containers. Reason for difference in per unit cost: Single plant wide overhead allocation method is applied for the whole indirect manufacturing cost at once and it ignores the different activities of the manufacturing. The activity based overhead allocation rate is calculated separately for each activity and accordingly the indirect costs are allocated to the products. Conclusion: Hence, cost allocated under both methods are different.

Horngren's Accounting, The Financial Chapters (12th Edition)

Horngren's Accounting, The Financial Chapters (12th Edition)

12th Edition

ISBN: 9780134486789

Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura

Publisher: PEARSON

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In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyz…

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Chapter 24, Problem P24.31APGA

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Horngren's Accounting, The Financial Chapters (12th Edition)

Ch. 24 - Prob. 1QC Ch. 24 - Which is not one of the potential advantages of...Ch. 24 - The Quaker Foods division of PepsiCo is most...Ch. 24 - Which of the following is not a goal of...Ch. 24 - Which of the following balanced scorecard...Ch. 24 - The performance evaluation of a cost center is...Ch. 24 - Prob. 7QC Ch. 24 - Prob. 8QC Ch. 24 - Prob. 9QC Ch. 24 - Prob. 10QC

Ch. 24 - Prob. 11AQC Ch. 24 - Prob. 1RQ Ch. 24 - Prob. 2RQ Ch. 24 - Prob. 3RQ Ch. 24 - Prob. 4RQ Ch. 24 - Prob. 5RQ Ch. 24 - Prob. 6RQ Ch. 24 - Prob. 7RQ Ch. 24 - Prob. 8RQ Ch. 24 - Prob. 9RQ Ch. 24 - 10. Explain the difference between a centralized...Ch. 24 - Prob. 11RQ Ch. 24 - Prob. 12RQ Ch. 24 - Prob. 13RQ Ch. 24 - Prob. 14RQ Ch. 24 - Prob. 15RQ Ch. 24 - Prob. 16RQ Ch. 24 - List the four types of responsibility centers, and...Ch. 24 - What is a performance evaluation system?Ch. 24 - What are the goals of a performance evaluation...Ch. 24 - Prob. 20RQ Ch. 24 - Prob. 21RQ Ch. 24 - Prob. 22RQ Ch. 24 - Prob. 23RQ Ch. 24 - Prob. 24RQ Ch. 24 - Prob. 25RQ Ch. 24 - Prob. 26RQ Ch. 24 - Prob. 27RQ Ch. 24 - Prob. 28RQ Ch. 24 - Prob. 29RQ Ch. 24 - Prob. 30RQ Ch. 24 - Prob. 31RQ Ch. 24 - Prob. 32RQ Ch. 24 - Prob. 33RQ Ch. 24 - What is a transfer price?Ch. 24 - Prob. 35ARQ Ch. 24 - Prob. 36ARQ Ch. 24 - Prob. S24.1SE Ch. 24 - Prob. S24.2SE Ch. 24 - Prob. S24.3SE Ch. 24 - Prob. S24.4SE Ch. 24 - Prob. S24.5SE Ch. 24 - Prob. S24.6SE Ch. 24 - Describing the balanced scorecard and identifying...Ch. 24 - Prob. S24.8SE Ch. 24 - Prob. S24.9SE Ch. 24 - Prob. S24.10SE Ch. 24 - Prob. S24.11SE Ch. 24 - Prob. S24.12SE Ch. 24 - Prob. S24A.13SE Ch. 24 - Prob. E24.14E Ch. 24 - Prob. E24.15E Ch. 24 - Prob. E24.16E Ch. 24 - E24-17 Computing product costs in traditional and...Ch. 24 - Identifying responsibility centers after...Ch. 24 - Prob. E24.19E Ch. 24 - Prob. E24.20E Ch. 24 - Prob. E24.21E Ch. 24 - Prob. E24.22E Ch. 24 - Prob. E24.23E Ch. 24 - Prob. E24.24E Ch. 24 - Prob. E24.25E Ch. 24 - Prob. E24.26E Ch. 24 - Prob. P24.27APGA Ch. 24 - Prob. P24.28APGA Ch. 24 - Prob. P24.29APGA Ch. 24 - Prob. P24.30APGA Ch. 24 - Prob. P24.31APGA Ch. 24 - Prob. P24.32BPGB Ch. 24 - Prob. P24.33BPGB Ch. 24 - Prob. P24.34BPGB Ch. 24 - Using ROI and Rl to evaluate investment centers...Ch. 24 - Prob. P24.36BPGB Ch. 24 - Prob. P24.37CT Ch. 24 - Continuing Problem P24-38 Using ROI and Rl to...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Comprehensive Problem for Chapters 22-24 The...Ch. 24 - Tying It All Together Case 24-1 Before you begin...Ch. 24 - Prob. 24.1DC Ch. 24 - Prob. 24.1EI Ch. 24 - Fraud Case 24-1 Everybody knew Ed McAlister was a...

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What is Cost Allocation? Definition & Process; Author: FloQast;https://www.youtube.com/watch?v=hLhvvHvZ3JM;License: Standard Youtube License