Chapter 4, Problem 1Q

What are the three common approaches for assigning overhead costs to products?

To determine

Concept Introduction:

Predetermined overhead allocation:

Manufacturing overhead cost is the pool of all indirect costs incurred for the production. These are the costs which are not directly traceable to the product. Manufacturing costs include indirect material, indirect labor and overheads. These costs are allocated to the products using the predetermined overhead allocation rate.

Activity Based Costing (ABC):

ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

To Indicate:The three common approaches to assign the overhead costs

Answer to Problem 1Q

The three common approaches to assign the overhead costs are as follows:

1. Predetermined overhead allocation

2. Volume based allocation

3. Activity based costing

Explanation of Solution

The three common approaches to assign the overhead costs are as follows:

1. Predetermined overhead allocation: Under this approach the entire manufacturing overhead is allocated to the production using a single overhead rate.

2. Volume based allocation: Under this approach the entire manufacturing overhead is allocated to the production using the number of units as base.

3. Activity Based Costing: Under this approach the entire manufacturing overhead is first dividend into the different production activities and then each activity cost is allocated to the production using the appropriate allocation for that activity.