Cost Allocation Techniques Paper 7

Answer (C) is correct. All the cost objects gathered in a cost pool should be similar enough that a single allocation base can be selected that will appropriately allocate all of them.

Answer (C) is correct. A cost allocation base is the common denominator for systematically correlating indirect costs and a cost object. The cost driver of the indirect costs is ordinarily the allocation base. In a capital-intensive manufacturer, machine hours are the best allocation base to use.

Answer (B) is correct. Since fixed costs are by their nature unchanging within the relevant range, fixed costs will remain constant at $560,000. Additionally, variable overhead costs per hour remain constant in the relevant range.

Answer (A) is correct. Normal rework costs incurred because of factors common to all units produced ordinarily are charged to factory overhead control to spread the costs over all good units.

Answer (B) is correct. Overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. The overhead control account should have the following costs: Indirect materials $ 5,000 Indirect labor ($45,000 – $40,000) 5,000 Other overhead 20,000 Total overhead $30,000

Answer (A) is correct. Wagner’s application rate for overhead is $2.50 per machine hour ($250,000 budgeted total ÷ 100,000 estimated machine hours), and each unit of output is estimated to require 2 machine hours (100,000 estimated machine hours ÷ 50,000 units budgeted output). Under a standard cost system, the amount of overhead applied during the year was therefore $240,000 (48,000 units actual output × $2.50 per machine hour application rate × 2 machine hours standard per unit).

Answer (D) is correct. Total indirect costs are $12,000,000 ($5,000,000 + $7,000,000). The appropriate allocation base is direct labor hours, since this more closely matches activity level than does indirect labor or the combination of the two. The budgeted indirect cost rate is thus $48 per direct labor hour ($12,000,000 ÷ 250,000).

Answer (B) is correct. The results from the production run of 1,000 units allow Baldwin to calculate its per-unit costs for materials ($1,000 ÷ 1,000 units = $1.00) and labor ($1,500 ÷ 1,000 units = $1.50). Overhead can then be derived as follows: Total cost per unit $4.30 Less: direct materials (1.00) Less: direct labor (1.50) Overhead per unit $1.80 The number of machine hours required to manufacture a single unit is .45 (450 hours ÷ 1,000 units). Therefore, $1.80 represents 45% of the cost of a machine hour ($1.80 ÷ .45 = $4.00). Since 150,000 hours were budgeted, total budgeted overhead for the year was $600,000 (150,000 hours × $4.00 per hour).

Answer (C) is correct. Direct labor hours budgeted for next year are 10,000 ($50,000 total ÷ $5 per hour). Factory overhead is applied at the rate of $7 per direct labor hour ($70,000 ÷ 10,000 hours). A job incurring 20 hours of direct labor will thus be charged with $140 of overhead ($7 per direct labor hour × 20 hours).

Answer (C) is correct. Service department costs are considered part of factory overhead and should be allocated to the production departments that use the services. A basis reflecting cause and effect should be used to allocate service department costs. For example, the number of kilowatt hours used by each producing department is probably the best allocation base for electricity costs.