The following information was gathered for Company J, a manufacturing company with three departments, A, B, and C:Manufacturing supplies cost is expected to be $300,000. Possible cost drivers are direct labor hours, direct materials cost, and number of units completed and sold. The three departments have varying amounts for these items. Department ADepartment BDepartment CDirect labor hours 15,000 40,000 45,000 Direct materials cost$500,000 $2,500,000 $2,000,000 # of units expected to be completed and sold 80,000 30,000 40,000 Based on this information, indicate whether each of the following statements is true or false.If number of units completed and sold is selected as the cost driver, the allocation rate for manufacturing supplies cost would be $2 per
unit._____If direct labor hours is selected as the cost driver, the manufacturing supplies cost allocated to Department B would be $100,000._____The manufacturing supplies cost allocated to Department C would be unaffected by the choice of the cost driver._____If the amount of bonuses to department managers is based on income after all expenses, the manager for Department A would prefer that direct materials cost be selected as the cost driver._____If the amount of bonuses to department managers is based on income after all expenses, the manager for Department B would prefer that direct labor hours be selected as the cost driver._____
What will be an ideal response?
| If number of units completed and sold is selected as the cost driver, the allocation rate for manufacturing supplies cost would be $2 per unit. | True |
| If direct labor hours is selected as the cost driver, the manufacturing supplies cost allocated to Department B would be $100,000. | False |
| The manufacturing supplies cost allocated to Department C would be unaffected by the choice of the cost driver. | False |
| If the amount of bonuses to department managers is based on income after all expenses, the manager for Department A would prefer that direct materials cost be selected as the cost driver. | True |
| If the amount of bonuses to department managers is based on income after all expenses, the manager for Department B would prefer that direct labor hours be selected as the cost driver. | False |
• If number of units completed and sold is selected as the cost driver, the allocation rate for manufacturing supplies cost would be $2 per unit computed as follows:
Allocation rate = Total cost to be allocated ÷ Cost driver (allocation base)
Allocation rate = $300,000 ÷ (80,000 units + 30,000 units + 40,000 units) = $2 per unit
• If direct labor hours is selected as the cost driver, the manufacturing supplies cost allocated to Department B would be $120,000 (rather than $100,000) computed as follows:
Allocation rate = $300,000 ÷ (15,000 direct labor hours + 40,000 direct labor hours + 45,000 direct labor hours) = $3 per direct labor hour
Allocation per cost object = Allocation rate × Weight of the cost driver for that cost object
Allocation of overhead cost to Department B = $3 per direct labor hour × 40,000 direct labor hours = $120,000
• The manufacturing supplies cost allocated to Department C is affected by the choice of the cost driver.
• Recall that the allocation rate equals the total cost to be allocated divided by the cost driver (allocation base). If they are compensated with bonuses based on income after all expenses, managers would prefer the allocation base that results in the lowest allocations of costs to their departments.
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