Activity-Based Costing - Example

The video tutorial explains how a company allocates overhead costs using both traditional and activity-based costing (ABC) methods. It begins with an overview of the traditional method, calculating the predetermined overhead rate based on direct labor hours. The tutorial then transitions to the ABC method, detailing the steps of identifying activities, finding cost pools, calculating activity rates, and applying these rates to products. The video concludes with a comparison of the costs per unit for both methods.

What is the basis for allocating overhead in the traditional method used by the company?

• Direct material costs

• Direct labor hours

• Machine hours

• Number of units produced

How is the predetermined overhead rate (POR) calculated in the traditional method?

• Estimated total allocation base divided by estimated total overhead cost

• Estimated total overhead cost divided by number of units produced

• Estimated total overhead cost divided by estimated total allocation base

• Estimated total overhead cost multiplied by estimated total allocation base

In the traditional method, what is the manufacturing overhead cost per unit for the small product?

• $9.85

• $29.50

• $11.88

• $13.33

What is the first step in the Activity-Based Costing (ABC) method?

• Calculate activity rates

• Identify activities

• Find cost pools

• Apply costs to products

What is the activity rate for processing orders in the ABC method?

• $750 per inspection

• $11.88 per order

• $9.85 per hour

• $13.33 per unit

How much cost is allocated to the small product using the ABC method?

• $77,220

• $126,630

• $26,250

• $89,890

What is the manufacturing overhead cost per unit for the large product using the ABC method?

• $22.48

• $24.23

• $11.88

• $29.50