Concept introduction:
Activity Based Costing (ABC):
ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.
Predetermined Overhead allocation rate:
The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.
The formula to calculate the Predetermined Overhead allocation rate is as follows:
To choose:
The truest statement while comparing the ABC and volume based cost system
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Managerial Accounting
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- Which of the following best describes a variable cost? A cost that: a. Represents a fixed proportion of total costs b. Has a direct relationship with outputc. Is sometimes also known as an indirect cos d. Falls on average, as output increases.arrow_forwardIn describing the cost formula equation, Y = a + bX, which of the following is correct?a. “Y” is the independent variableb. “a” is the variable cost per unitc. “a” and “b” are valid for all levels of activityd. in the high-low method, “b” equals the change in cost divided by the change in activity.arrow_forwardWhich of the following statements about CVP analysis is true? O a. Operating income calculations in CVP analysis are based on groSs margin. O b. The CVP analysis assumes that total variable costs remain the same over a relevant range. O c. The CVP analysis assumes that variable costs per unit remain the same over a relevant range. O d. Unit selling price, unit variable costs, and unit fixed costs are known and remain constant. O e. All of the given answers are false.arrow_forward
- I. If the coefficient of correlation for machine hours is higher than the coefficient of correlation for direct labor hours, then, it is more reasonable to use the direct labor hours as a basis for computing (estimating) total cost (Y=a + bx). II. Relevant range assumptions: relevant range refers to the range of activity within which the identified cost behavior patterns are valid. Any level of activity beyond this range may show different cost behavior. A. Both Statements are True B. Both Statements are False C. Statement A is true, Statement B is False D. Statement B is true, Statement A is Falsearrow_forwardSelect the correct statement concerning the cost-volume-profit graph at right: a. The point identified by "B" is the break-even point. b. Line F is the variable cost line. c. At point B, profits equal total costs. d. Line E is the total cost line. Line F Line E Line Darrow_forwardAnswer the following: 1. The slope of line A is equal to the: a. fixed cost per unit. b. selling price per unit. c. profit per unit. d. semivariable cost per unit. e. unit contribution margin. 2. Line C represents the level of: a. fixed cost. b. variable cost. c. semivariable cost. d. total cost. e. mixed cost. 3. Line B represents the level of: a. fixed cost. b. variable cost. c. semivariable cost. d. total cost. e. mixed cost. 4. The slope of line B is equal to the: a. fixed cost per unit. b. selling price per unit. c. variable cost per unit. d. profit per unit. e. unit contribution margin. 5. Line A is the: a. total revenue line. b. Option 2 c. fixed cost line. d. variable cost line. e. total cost line. f. profit line.arrow_forward
- In describing the cost formula equation, Y = a +bX, which of the following is correct: Multiple Choice O O O "Y" is the independent variable. "a" is the variable cost per unit. "a" and "b" are valid for all levels of activity. in the high-low method, "b" equals the change in cost divided by the change in activity.arrow_forwardWhich of the following statements is true? Select one: O a. The most complex of the cost estimation methods is the high-low method. O b. Engineering approach approximates cost function by classifying each account as either variable or fixed based on the analyst's knowledge of how the account behaves. C The high-low method of deriving an estimated cost line uses all the data points available. O d. In approximating the cost function, the account analysis classifies costs based upon an industrial engineer's evaluation of production methods, and material, labor, and overhead requirements. O e. The high-low method is used to derive an estimated line of cost behavior by graphically connecting the two cost amounts identified with the highest and lowest volume levels.arrow_forwardTRUE/FALSE. Write T' if the statement is true and 'F' if the statement is false. 17) Target costing sets prices by computing an average cost and then adding a desired markup.arrow_forward
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