Question

You may choose to answer option A or option B; please indicate your choice in the subject line.

Option A: In chapter 27 we discuss value added (VA) and non value added activities (NVA). Each activity performed by an organization creates cost. If the activity does not create any value for the customer, its cost represents wasted resources. Provide examples of VA and NVA packaging you have encountered in the produce section of a grocery store.

Option B: In Chapter 26 we discuss three overhead allocation methods. 1) single plant-wide factory overhead rate; 2) multiple production department overhead rates; 3) activity-based costing. How do we know when to use which overhead allocation method? Why wouldn't I just use the actual overhead cost and avoid making an allocation altogether?

please read the direction and give me proper answer, thank you

Answer 1

Option B:

1) Single plant-wide factory overhead rate is used when the company produces a single type of product or renders a single type of service and there is only involvement of single department in producing or rendering the same.

2) Multiple production department overhead rates are used when there are multiple departments involved in the production of products and the sales mix consists of few types of products.

3) Activity-based costing is used when the production of goods and services involves a lot of activities to be taken place.

When there involves a lot of activities it is recommended to use activity based costing to know the return per activity and where the company need to improve its performance. Likewise as explained above when there are less number of product types, it is better to use single plant-wide factory overhead rate and when multiple departments are involved it is better to use multiple production department overhead rates.

We can't use the actual overhead cost because, if we use the actual overhead cost without allocating to various departments or activities we can know the progress of the company in whole and we cannot improve the actual deficiency if any, in any department or activity.