Unit-based product costing assigns direct labor, direct materials, and overhead to products. Direct materials and direct labor are assigned using direct tracing. Assignment of overhead costs, however, relies on driver tracing and perhaps allocation. Unit-based costing first assigns overhead costs to a functional unit, creating plant or departmental cost pools. Next, these pooled costs are assigned to products using predetermined overhead rates based on unit-level drivers. Unit-level drivers measure the demands placed on. Unit-level activities are those that are performed each and every time. From the dropdown below, select all unit-level drivers:

The overhead rate is calculated using the following formula:

Overhead rate = Budgeted annual overhead/Budgeted annual driver amount

Apply the Concepts

Scenario I: Goodmark Company produces two products: scented and regular birthday cards. Goodmark uses a plantwide rate based on direct labor hours. The estimated and actual data for the coming year are provided below:

Estimated overhead		$720,000
Expected activity (direct labor hours)		180,000
Actual activity (direct labor hours)
Scented cards		20,000
Regular cards		160,000
Units produced
Scented		20,000
Regular		200,000

Required:

1.

Calculate the following:

a.

The predetermined overhead plantwide rate (round to the nearest cent): $ per direct labor hour

b.

The applied overhead for each product (round to the nearest dollar):

Scented:	$
Regular:	$

c.

Overhead per unit for each product (round to the nearest cent):

Scented:	$
Regular:	$

Overhead Variances

For plantwide rates, all budgeted overhead costs are assigned to a plantwide pool. Next, a plantwide rate is calculated using a unit-level driver. Finally, overhead costs are assigned to products by multiplying the overhead rate by the actual units of the driver used by each product. The overhead cost per unit of product is simply the overhead assigned to the product divided by the units produced.

The overhead assigned to products using predetermined overhead rates is called applied overhead. Actual overhead – Applied overhead is called an overhead variance. If the difference is positive, then the variance is referred to as and if the difference is negative, then the variance is said to be . If the overhead variance is not material, then it is typically closed out to . On the other hand if the variance is material, then the variance is prorated among (select all that apply):

Apply the Concepts

Scenario II: Goodmark Company produces two types of birthday cards: scented and regular. Goodmark uses the Overhead Control account to accumulate both actual and applied overhead. The company has the following data for the past year:

Actual overhead		$760,000
Sales		$3,500,000
Materials used		$1,100,000
Applied Overhead (in each account):
Work in process		$72,000
Finished goods		216,000
Cost of goods sold		432,000

Required:

1.

Calculate the overhead variance for the year and label it under- or overapplied.

Overhead variance: $

2.

Assuming the variance is not material, the following closing entry would be made:

Debit for $ and credit for $.

3.

If the overhead variance is material, indicate how much of the variance would be to each of the following accounts (if an amount is zero, enter "0"):

Work in process		$
Materials		$
Cost of goods sold		$
Sales revenue		$
Finished goods		$

Departmental Rates

For departmental rates, overhead costs are assigned to individual production departments creating departmental overhead cost pools. The sum of the overhead in the departmental cost pools must the overhead in the plantwide cost pool. Overhead intensity and patterns of consumption by products can differ from department to department. Accordingly, departmental rates are used because of the belief that they better reflect each product's consumption of resources and thus improve decision making and control.

Once overhead is assigned to individual production departments, then unit-based drivers such as direct labor hours and machine hours are used to compute departmental overhead rates. Overhead is assigned to products by multiplying the departmental rates by the amount of the driver used in each department. The total overhead assigned to products is the sum of the amount received in each department.

Apply the Concepts

Scenario III: Goodmark Company produces two types of birthday cards: scented and regular. During the year, 20,000 scented cards and 200,000 regular cards were produced. Goodmark has two production departments: Cutting and Printing. Direct labor hours are used to assign the overhead of Cutting and machine hours are used for Printing. The data for the two producing departments are given below:

	Cutting		Printing		Total
Direct labor hours:
Scented	10,000		10,000		20,000
Regular	150,000		10,000		160,000
Total	160,000		20,000		180,000
Machine hours:
Scented	2,000		8,000		10,000
Regular	8,000		72,000		80,000
	10,000		80,000		90,000
Overhead costs	$216,000		$504,000		$720,000

Required:

1.

Calculate the overhead rates for each department (round to the nearest cent):

Cutting:	$	per direct labor hour
Printing:	$	per machine hour

2.

Calculate the overhead cost per unit (round to the nearest cent):

Scented:	$
Regular:	$

Activity-Based Costing

Both plantwide and departmental rates rely on unit-level drivers to assign overhead to products. However, not all overhead is caused by or related to units produced. Setup costs, for example, are incurred each time a batch is produced and a batch may consist of 1,000 units or 10,000 units. Setup costs tend to increase as batches increase—not as units produced increase. There are other factors, called non-unit drivers, which better measure the demand that products place on non-unit overhead activities. If non-unit overhead resources are a significant portion of total overhead, then using only unit-based drivers to assign overhead may create distorted product costs. Distorted product costs will not occur provided that products consume the non-unit overhead activities in as the unit-level activities. Product cost distortion requires that product diversity, which means simply that products consume overhead activities in . Product diversity is caused by such things as differences in (select all that apply):

A direct method of overcoming the distortions caused by unit-level rates when product diversity exists (assuming non-unit level overhead is significant) is to expand the number of rates used so that the rates reflect the actual consumption of overhead costs by the various products. Instead of pooling the overhead costs in plant or departmental pools, rates are calculated for each individual overhead activity. The activity rates are based on causal factors that measure consumption. Costs are assigned to each product by multiplying the activity rates by the amount consumed of each activity, as measured by the activity driver.

Activity costs can also be assigned using consumption ratios. Consumption ratios reflect the proportion of an activity consumed by the individual products. If the activity consumption ratios are approximately equal to the direct labor consumption ratio, then this would indicate that there is . This outcome, in turn, would indicate that a plantwide rate based on direct labor hours is functioning and that there is for activity rates.

The total of all assigned activity costs is the amount of overhead consumed by products. Because the assignment uses causal factors, it tends to be accurate than assignments using only unit-level drivers.

Apply the Concepts

Scenario IV: Goodmark Company produces two types of birthday cards: scented and regular. Expected product data for the coming year are given below. Overhead costs are identified by activity.

	Scented Cards	Regular Cards	Total
Units produced	20,000	200,000	-
Prime costs	$160,000	$1,500,000	$1,660,000
Direct labor hours	20,000	160,000	180,000
Number of setups	60	40	100
Machine hours	10,000	80,000	90,000
Inspection hours	2,000	16,000	18,000
Number of moves	180	120	300

Overhead costs:

Setting up equipment	$240,000
Moving materials	120,000
Machining	200,000
Inspecting products	160,000

Required:

1.

Answer the following questions:

a.

Calculate the activity consumption ratios for Scented cards (round to two decimal places).

Setups:
Moving materials:
Machining:
Inspection:

b.

If only one rate based on direct labor hours were used to assign overhead, Scented Cards would receive about percent of the total overhead. Upon comparing this overhead assignment with the activity consumption ratios calculated in part a, it is clear that a plantwide rate would the activity-based cost assignments.

2.

Calculate the four activity rates (round to the nearest cent).

Setups:		per setup
Moving materials:		per move
Machining:		per machine hour
Inspection:		per inspection hour

3.

Calculate the total unit costs using activity rates to assign overhead (round to the nearest cent).

Scented:	$
Regular:	$

Answer rating: 100% (QA)

1 aTo calculate the predetermined plant wide rate Budgeted annual overhead Budgeted annual driver level Total overhead cost Direct Labor Hours 720000 180000 4 per DLH bTo calculate the applied overhea... View the full answer