Question

What is the difference between the plant-wide overhead allocation approach and the departmental overhead allocation approach?

A.	The plant-wide rate is determined from the average of the individual departmental rates. Using a plant-wide rate is a more efficient manner of accounting and providing management information

B.	The total plant rate is obtained by divided by the total number of departments. It is a more efficient manner of accounting and providing management information.

C.	The plant-wide allocation approach uses one cost pool to collect and apply overhead costs and has one predetermined overhead rate, while the departmental allocation approach uses several cost pools (one for each department) and has several predetermined overhead rates

D.	The plant-wide allocation approach sets a predetermined rate for each department and averages this into a plant-wide allocation, while the departmental allocation approach uses several cost pools (one for each department) and has several predetermined overhead rates.

Al’s Wooden Turnings (AWT Company) makes two products: funerary urns and salad bowls. The company produces 4,000 salad bowls and 2,000 urns per year. Each urn requires two hours of direct labor to produce, and each bowl requires one hour of direct labor to produce.

The following table summarizes the direct material and labor costs for each item:

	Urns	Bowls
Direct material/unit	$20	$15
Direct labor/unit	$30	$15

Al’s Wooden Turnings factory has an annual estimated overhead of $250,000, as follows:

Activity	Budgeted Overhead	Estimated Volume/Number
Machine setups	$100,000	120 setups
Manufacturing raw wood to product	$100,000	50,000 bf (board feet)
Finishing wood and packing	$50,000	6000 items
Total Overhead	$250,000

From an internal analysis it appears that the two products required the following activity levels for 2015:

Activity	Urns	Bowls	Totals
Machine setups	40 setups	80 setups	120 setups
Manufacturing raw wood to product	30,000 bf	20,000 bf	50,000 bf
Finishing wood and packing	2,000 urns	4,000 bowls	6,000 items

Using activity based costing, what is the total per-unit cost of each urn. _______________.

Answer 1

C is the answer.

Per unit cost of each urn = $105.00

Working:

Activity	Activity cost	Activity Driver		Activity rate
Machine setups	100000	120	setups	$833.33	per setup
Manufacturing raw wood to product	100000	50000	board feet (bf)	$2.00	per bf
Finishing wood and packing	50000	6000	items	$8.33	per unit
Total	250000
		Urns		Bowls
Activity	Activity Rate	Activity units	Cost	Activity units	Cost
Machine setups	$833.33	40	33333	80	66667
Manufacturing raw wood to product	$2.00	30000	60000	20000	40000
Finishing wood and packing	$8.33	2000	16667	4000	33333
Total Overheads allocated			110000		140000
Units produced			2000		4000
Overhead cost per unit			$55.00		$35.00