Layman, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity, production processes, and units manufactured. Job no. 78 was manufactured by Joe Bingham who earns $14 per hour, whereas job no. 79 was completed by Susan Fortner who earns $20 per hour. If Joe and Susan are equally efficient, would the company be better off using direct labor cost or direct labor hours as the cost driver in its predetermined overhead rate? Briefly explain.

Question

What will be an ideal response?

Answer 1

The jobs produced by Bingham and Fortner are similar in terms of complexity, production processes, and units manufactured, and both workers are equally efficient. Thus, the amount of overhead incurred on job no. 78 should be relatively the same as that incurred on job no. 79. If direct labor hours are used in the predetermined overhead rate, the overhead applied to the two jobs will be the same, which is good accounting in this case. Conversely, if direct labor cost were used, Susan's job would absorb more overhead because of the higher labor cost-an improper accounting since both jobs incurred the same amount.