Managerial Accounting (5th Edition)
5th Edition
ISBN: 9780134128528
Author: Karen W. Braun, Wendy M. Tietz
Publisher: PEARSON
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Textbook Question
Chapter 4, Problem 1QC
(Learning Objective 1) Cost distortion is more likely to occur when
- a. departments incur different types of overhead and the products or jobs use the departments to a different extent.
- b. a company manufactures one type of product.
- c. all products require the same amount and type of processing activities.
- d. a company uses departmental overhead rates rather than a single plantwide overhead rate.
Expert Solution & Answer
To determine
To identify: The situation in which cost distortion is more likely to occur
Answer to Problem 1QC
Option a. Cost distortion is more likely to occur when departments incur different types of overhead and the products or jobs use the department to a different extent.
Explanation of Solution
Cost distortion occurs when some products or jobs are overcosted while others are undercosted under simple allocation system. And this occurs because department incur different types of overhead and the products or jobs use the department resources in different quantities.
a.
Departments incur different types of overhead and the products or jobs use the department to a different extent: This option is correct because cost distortion is the result of different types of overheads incurred by various departments.
b.
A company manufactures one type of product: This is an incorrect option as the cost distortion does not occur when there is a single product manufactured by the entity.
c.
All products require the same amount and type of processing activities: Cost distortion will not take place if the amounts of all products are same and type of processing activities is also same. Hence, the choice is incorrect.
d.
A company uses departmental overhead rates rather than a single plantwide overhead rate: This option is incorrect as the use of departmental overhead rate in the place of the single plantwide overhead rate will not distort the cost in any manner.
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Students have asked these similar questions
One of the disadvantages of the departmental and the plantwide overhead rate methods is that
OA. technological advances may decrease the effect of direct labor hours as a percentage of total manufacturing costs.
B. technological advances may increase direct labor hours as a percentage of total manufacturing costs.
OC. direct labor hours may decrease the effect of technological advances.
OD. direct labor hours may increase the effect of technological advances.
If the activities that generate overhead costs vary between departments and products, adopting a plantwide manufacturing overhead rate would result in skewed product costs.True \sFalse
If the activities causing overhead costs are different across different departments and products, use of a plantwide factory overhead rate will cause distorted product costs.
True
False
Chapter 4 Solutions
Managerial Accounting (5th Edition)
Ch. 4 - (Learning Objective 1) Cost distortion is more...Ch. 4 - (Learning Objective 2) The first step in computing...Ch. 4 - (Learning Objective 2) Activities incurred...Ch. 4 - (Learning Objective 3) Which of the following is...Ch. 4 - (Learning Objective 3) The potential benefits of...Ch. 4 - (Learning Objective 4) Lean operations are...Ch. 4 - Prob. 7QCCh. 4 - (Learning Objective 4) Concerning lean operations,...Ch. 4 - (Learning Objective 5) Which of the following is...Ch. 4 - (Learning Objective 5) Which of the following...
Ch. 4 - Understanding key terms (Learning Objectives 1, 2,...Ch. 4 - Use departmental overhead rates to allocate...Ch. 4 - Compute departmental overhead rates (Learning...Ch. 4 - Prob. 4.4SECh. 4 - Prob. 4.5SECh. 4 - Calculate a job cost using ABC (Learning Objective...Ch. 4 - Classifying costs within the cost hierarchy...Ch. 4 - Classifying costs within the cost hierarchy...Ch. 4 - Determine the usefulness of refined costing...Ch. 4 - Prob. 4.10SECh. 4 - Identifying costs as value-added or...Ch. 4 - Identify lean production characteristics (Learning...Ch. 4 - Identify the DOWNTIME activities at a manufacturer...Ch. 4 - Prob. 4.14SECh. 4 - Classifying costs of quality (Learning Objective...Ch. 4 - Quality initiative decision (Learning Objective 5)...Ch. 4 - Assess the impact of a quality initiative...Ch. 4 - Identify ethical standards violated (Learning...Ch. 4 - Compare traditional and departmental cost...Ch. 4 - Compute activity rates and apply to jobs (Learning...Ch. 4 - Apply activity cost allocation rates (Learning...Ch. 4 - Using ABC to bill clients at a service firm...Ch. 4 - Compare traditional and ABC allocations at a...Ch. 4 - Compare traditional and ABC allocations on a job...Ch. 4 - Use ABC to allocate manufacturing overhead...Ch. 4 - Continuation of E4-25A: Determine product...Ch. 4 - Prob. 4.27AECh. 4 - Classify costs and make a quality-initiative...Ch. 4 - Prob. 4.29AECh. 4 - Compare traditional and departmental cost...Ch. 4 - Prob. 4.31BECh. 4 - Prob. 4.32BECh. 4 - Prob. 4.33BECh. 4 - Compare traditional and ABC cost allocations at a...Ch. 4 - Prob. 4.35BECh. 4 - Prob. 4.36BECh. 4 - Prob. 4.37BECh. 4 - Prob. 4.38BECh. 4 - Classify costs and make a quality-initiative...Ch. 4 - Prob. 4.40BECh. 4 - Prob. 4.41APCh. 4 - Use ABC to compute full product costs (Learning...Ch. 4 - Prob. 4.43APCh. 4 - Prob. 4.44APCh. 4 - Prob. 4.45APCh. 4 - Prob. 4.46BPCh. 4 - Prob. 4.47BPCh. 4 - Comprehensive ABC implementation (Learning...Ch. 4 - Using ABC in conjunction with quality decisions...Ch. 4 - Comprehensive ABC (Learning Objectives 2 3)...Ch. 4 - Prob. 4.51SCCh. 4 - Discussion Questions 1. Explain why departmental...Ch. 4 - ABC in Real Companies Choose a company in any of...Ch. 4 - Value-Added versus Non-Value-Added at a Restaurant...Ch. 4 - Ethics involved with ABC and hazardous waste costs...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Activity-based costing: a. None of the given answer. O b. typically applies overhead costs using direct labor-hours. O c. assigns some non-manufacturing overhead costs to products costs. O d. is easier than the plant-wide (traditional) costing to implement because it requires less record-keeping. uses departments overhead rate to assign overhead. O e.arrow_forwardWhy is it better to use separate overhead rates? * A. Some departments are labor-intensive, some are machine-intensive.B. Labor rates vary considerably among departments.C. The resulting overhead rates are all about the same.D. All jobs require about the same percentage of time in all departments.arrow_forwardWhich of the following statements is true? 1. Departmental overhead rates will correctly assign overhead costs in situations where a company has a range of products that differ in volume, lot size, or complexity of production. 2. When a company implements activity-based costing, manufacturing overhead cost is often shifted from low volume products to high volume products, with a higher unit cost resulting for the high volume products. 3. Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.arrow_forward
- Accounting Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs. Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below area sample of possible cost pools for Waterways. Assembling Payroll Billing Plant supervision Digging trenches Product design Janitorial Purchasing materials Machine maintenance Selling Machine setups Testing Molding Welding Packaging Using the following information, determine the overhead rates and the actual cost assigned for each of the…arrow_forwardTwo years ago, company scientists developed an alloy with all of the properties of the raw materials used in XL-D that generates no wastewater. Some prototype components using the new material were produced and tested and found to be indistinguishable from the old components in every way relating to their fitness for use. The only difference is that the new alloy is more expensive than the old raw material. The company has been test-marketing the newer version of the component, referred to as XL-C, and is currently trying to decide its fate. Manufacturing of both components begins in the Production Department and is completed in the Assembly Department. No other products are produced in the plant. The following information relates to the two components: Units produced Raw material costs per unit Direct labor-hours per unit-Production Direct labor-hours per unit-Assembly Direct labor rate per hour-all labor Machine-hours per unit-Production Machine-hours per unit-Assembly Testing hours…arrow_forward1. If management wants the most accurate product cost, which of the following costing methods should be used? O Normal costing using a plantwide overhead rate. O Activity-based costing. O Volume-based costing using a plantwide overhead rate. O Volume-based costing using departmental overhead rates. 2. Which costing method tends to overstate the cost of high-volume products? O Differential costing. O Job order costing. O Activity-based costing. O Traditional volume-based costing. 3. Disadvantages of activity-based costing include O It is not acceptable under GAAP for external reporting. O It can be costly to implement. O It can be used in activity-based management. O It is not acceptable under GAAP for external reporting and it can be costly to implement.arrow_forward
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- Which of the following statements is false? A. The departmental and traditional costing methods create cost distortions when there is significant costs associated with batch activities. B. The manufacturing overhead is applied to product by applying the POHR to actual cost drivers that occur during the production period C. The activity based costing system provides the most accurate product costing results D. Actual manufacturing overhead costs and the actual cost driver amounts are used to create the predetermined overhead rate (POHR)arrow_forwardPlease help me understand why is direct labor a poor base for allocating overhead in many companies? Please Explain thoroghly so I can understand better. Thank Youarrow_forwardAs compared to a high-volume product, a low-volume product a. usually requires less special handling. b. is usually responsible for more overhead costs per unit. c. requires relatively fewer machine setups. d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead. ~ C An 4. W Parrow_forward
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