Question

please, I need 7-8 meaningful sentences as an answer ( reply saying how i liked the post or adding some details to it) to this post. I would really appreciate it

ACTIVITY BASED COSTING AND ANALYSIS

Because overhead cannot be applied to the units of production in the same manner that direct labor and direct materials can, we assign overhead costs by using one of three allocation methods. The three different methods of assigning overhead costs are a single plantwide overhead rate, departmental overhead rates, and activity-based costing (ABC) rates. A plantwide overhead rate is the easiest and cheapest method to implement because it uses just one single rate to apply overhead to production. The other two methods, however, use multiple rates and are therefore more difficult to implement. While a single plantwide overhead rate is the simplest allocation system, it can distort the cost of a particular product. In fact, if there is more than one type of unit being produced, it will almost certainly distort the overhead cost per unit at least to some extent. In the plantwide overhead rate system, the total budgeted overhead costs are all merged into a single overhead cost pool. It is then divided by the selected allocation base – a volume-related measure such as direct labor hours or machine hours – to become a single overhead rate. This rate is applied to all products based off of this chosen allocation base. The problem with this method is that it assumes all of the factory overhead costs correspond exactly with the single overhead rate. When different products are produced, the overhead used to produce each product will appear the same under the plantwide allocation method, which distorts the true costs of each product. This is because some products require expensive machinery and/or more labor to produce, while others may require cheaper machinery or less labor to produce, for example. Therefore, the more diverse a company’s products are, the greater the distortion will be.

Answer 1

How I liked the post is

1. I agree that three methods of overhead allocation are assigned to overhead costs as overhead costs can't be directly applied to the units of production in the same manner that direct materials and direct labor can.

2. I even agree that plant-wide overhead rate is the easiest and cheapest method to implement but it doesn't gain over allocating things as activity based costing (ABC) method does in some areas.

3. Activity based costing assigns costs after recognizing the relationship between costs, activities and products which is a drawback in plant-wide overhead rate.

4. Some staff salaries are difficult to assign for a particular product produced. So, its not much preferred in some manufacturing units.

5. But it's much more reliable in terms of allocating this cost in product costing/pricing, target costing etc,.

6. But mentioned above the plant-wide overhead rate also has its drawbacks of same rate to different products distorting the true costs of each product.

7. Even the problem with this method is that it assumes all of the factory overhead costs correspond exactly with the single overhead rate as mentioned in the question.

8. So, adding some details. every method has its pros and cons and here the activity based costing has its own area of expertise and also the same with the case of plant-wide overhead rate in its area of expertise. But concluding plant-wide overhead rate is the easiest and cheapest ways preferred by many of the manufacturing units.