ACCOUNTING FOR FACTORY OVERHEAD AND ABC (ADAPTED)

I. True or False – 10 points.

1. When the total amount of underallocation or overallocation is small, relative to total operating income,
and inventory levels are low, the managers prefer to use the proration method because it is the most
accurate method of allocating under or over overhead costs.
2. Traditional costing systems usually rely on volume measures such as direct labor hours and/or machine
hours to allocate all overhead costs to products.
3. Traditional costing allocates all manufacturing overhead to products while activity based costing
assigns manufacturing overhead costs consumed by products to those products.
4. Traditional costing disregards selling and administrative expenses because they are assumed to be
period expenses.
5. Activity based costing does not conform to Generally Accepted Accounting Principles (GAAP).
6. Unit output-level costs are the costs of activities performed on each individual unit of a product or
service.
7. Product-sustaining costs are the costs of activities undertaken to support individual products or services
regardless of the number of units or batches in which the units are produced.
8. The allocation base is the cost driver the causes overhead.
9. In the estimation of manufacturing overhead, as well as the estimation of the based to be used for
allocation, it is important to determine what capacity of production should be adopted.
10. Based on proration approach, if manufacturing overhead had been underallocated, the Work in Process,
Finished Goods, and Cost of Goods Sold accounts would be increased (debited) instead of decreased
(credited).

II. Multiple Choice – 10 points.

1. Traditional cost systems distort product costs because:

A. competitive pricing is ignored
B. they apply average support costs to each unit of product
C. they do not know how to identify the appropriate units
D. they do not emphasize financial accounting requirements

2. In a normal costing system, the Manufacturing Overhead Control account:

A. is debited with actual overhead costs
B. is increased by allocated manufacturing overhead
C. is credited with amounts transferred to Work-in-Process
D. is decreased by allocated manufacturing overhead

3. All of the following are true of the Work-in-Process Control account EXCEPT that:
A. it is an asset account
B. it tracks all material purchases
C. it tracks job costs from beginning through completion
D. the balance equals the sum of amounts from all in-process individual job-cost records

4. All of the following are true of plant utility costs EXCEPT:

A. it is an indirect cost
B. the source document is the utility bill
C. the cost increases the Manufacturing Overhead Control account
D. the cost increases the Work-in-Process Control account

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ACCOUNTING FOR FACTORY OVERHEAD AND ABC (ADAPTED)

5. The spreading of underallocated or overallocated overhead among ending work-in-process, finished

goods, and cost of goods sold is called:
A. the proration approach
B. the adjusted allocation rate approach
C. the write-off of cost of goods sold approach
D. None of these answers are correct.

6. Cost drivers are

A. Accounting techniques used to control costs.
B. It is a basis to assign costs to cost object.
C. Accounting measurements used to evaluate whether performance is proceeding according to plan.
D. All of the above.

7. An activity-based costing system identifies the following except:

A. The causal relationship between the incurrence of costs and activities.
B. Determines the cost driver for each activity.
C. Applies costs to products on the basis of resources (drivers) consumed.
D. None of the above.

8. Design of an ABC system requires:

A. that the job bid process be redesigned
B. that a cause-and-effect relationship exists between resource costs and individual activities
C. an adjustment to product mix
D. Both B and C are correct.

9. ABC systems create:

A. one large cost pool
B. activity-cost pools with a broad focus
C. homogenous activity-related cost pools
D. activity-cost pools containing many direct costs

10. ABC systems:

A. limit cost drivers to units of output
B. allocate costs based on the overall level of activity
C. highlight the different levels of activities
D. generally, undercost complex products

III. Problem Solving – 30 points.

PROBLEM1
IGNEOUS Company budgeted total variable factory overhead costs at P200,000 for the current period. In
addition, the Company budgeted costs for factory rent at P220,000, costs for depreciation of office
equipment at P15,000, costs for office rent at P102,000, and costs for depreciation of factory equipment at
P40,000. All these costs were based upon estimated machine hours of 57,500. At the end of the period, the
Factory Overhead control account had a balance of P680,000. Actual machine hours were 84,000.

Calculate the following:

1. Total budgeted fixed overhead costs.
2. Total budgeted factory overhead costs for the period.
3. Predetermined overhead rate.
4. The underapplied factory overhead for the period.
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ACCOUNTING FOR FACTORY OVERHEAD AND ABC (ADAPTED)

PROBLEM2
METAMORPHIC Corporation used a predetermined overhead rate based on estimated direct labor hours
of 120,000. During the year it incurred P800,000 actual overhead, but it planned to incur P480,000 of
overhead. The company applied P640,000 of overhead during the year.

Calculate the following:

5. The predetermined overhead rate for the period.
6. The actual hours incurred.
7. The actual overhead rate.

PROBLEM3
At year-end 2022, SEDIMENTARY Generator Co. had a P40,000 debit balance in Manufacturing
Overhead Control account. Overhead is applied to products based on direct labor cost. Relevant account
balance information at year-end follows:

Work in Finished
Cost of
Process Goods
Goods Sold
Inventory Inventory
Direct material P20,000 P80,000 P100,000
Direct labor 20,000 80,000 100,000
Factory overhead 10,000 40,000 50,000

Required:
8. What predetermined OH rate was applied during the year?
9. Calculate the ending balance of work in process.
10. If the company used proration approach based on the ending balances to allocate the underapplied
overhead, how much is the adjusted balance of finished goods inventory?

PROBLEM4
GYPSUM Corporation has provided the following data from its activity-based costing system:

Activity Cost
Pool Total Cost Total Activity
Assembly P698,720 44,000 Machine-hours
Processing orders 90,763 1,900 orders
Inspection 119,535 1,950 Inspection-hours

The company makes 340 units of product P23F a year, requiring a total of 710 machine-hours, 80 orders,
and 40 inspection-hours per year. The product's direct materials cost is P40.05 per unit and its direct labor
cost is P14.35 per unit. The product sells for P121.90 per unit.

Required:
11. According to the activity-based costing system, calculate the total overhead costs of product P23F.
12. According to the activity-based costing system, calculate the total product costs of P23F.
13. According to the activity-based costing system, the product margin for product P23F is?

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ACCOUNTING FOR FACTORY OVERHEAD AND ABC (ADAPTED)

PROBLEM5
SILICA Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool Total Activity

Fabrication 80,000 machine-hours
Order processing 400 orders
Other Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and facility-sustaining costs.

The company has provided the following data concerning its costs:

Wages and salaries P560,000

Depreciation 280,000
Occupancy 100,000
Total P940,000

The distribution of resource consumptions across activity cost pools is given below:

Activity Cost Pools

Order
Fabrication Other Total
Processing
Wages and salaries 10% 80% 10% 100%
Depreciation 20% 40% 40% 100%
Occupancy 10% 40% 50% 100%

Determine the following:

14. The activity rate for the Fabrication activity cost pool.
15. The activity rate for the Order Processing activity cost pool.