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CHAPTER 4 ACTIVITY-BASED COSTING QUESTIONS FOR WRITING AND DISCUSSION 1. A predetermined overhead rate is simply an estimate of the overhead used per unit of driver. It is calculated using budgeted over- head and budgeted levels of the associated driver. Predetermined rates are used be- cause actual overhead may be incurred nonuniformly throughout the year. 2. Under- and overapplied overhead are mea- sures of the difference between the actual and applied overhead assigned to produc- tion. Underapplied overhead means too little was applied, and overapplied means too much was applied. 3. Plantwide overhead rates assign overhead to products in proportion to the amount used of the unit-based driver. If all products con- sume overhead in proportion to this unit- based driver, no distortion will occur. Cost distortion can occur if the products consume some overhead activities in different propor- tions than those assigned by the unit-based driver (the product diversity factor). No significant distortion will occur unless the activities that are consumed in different proportions make up a significant proportion of the total overhead costs. Thus, two key factors are product diversity and significant non-unit-level overhead costs. 4. Non-unit-related overhead activities are those overhead activities that are not highly correlated with production volume mea- sures. Examples include setups, materials handling, and inspection. Non-unit-based cost drivers are causal factors that explain the consumption of non-unit-related over- head. Examples include setup hours, number of moves, and hours of inspection. 5. An overhead consumption ratio measures the proportion of an overhead activity con- sumed by a product. 6. Agree. Prime costs can be assigned using direct tracing and therefore do not cause cost distortions. Overhead costs, however, are not directly traceable and can cause dis- tortions. For example, using unit-based drivers to trace non-unit-based overhead costs would cause distortions. 7. Activity-based product costing is a costing approach that first assigns costs to activities and then to products. The assignment is made possible through the identification of activities, their costs, and the use of cost drivers. 8. The six steps are: (1) identify, define, and classify activities and key attributes; (2) as- sign the cost of resources to activities; (3) assign the cost of secondary activities to primary activities; (4) identify cost objects and specify the amount of each activity con- sumed by specific cost objects; (5) calculate primary activity rates; and (6) assign activity costs to cost objects. 9. The cost of resources is assigned to activit- ies using direct tracing and resource drivers. Resource drivers such as effort expended and material usage trace costs to activities using causal relationships. Assign- ing costs to activities requires unbundling the general ledger. General ledger accounts accumulate costs by department and by account—not by activity. Thus, the costs in
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This note was uploaded on 01/31/2009 for the course ACCOUNTING ACCT 470 taught by Professor Professorrajkiani during the Spring '08 term at California State University , Monterey Bay.

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