DMC Company manufactures a standard and a custom version of a boat engine. Overhead costs include a significant amount of indirect labor and other costs related to moving materials and setting up machines for each batch of engines that are produced. The rest of the overhead is mostly facility-based. The actual activity for a year was as follows:

Total Standard engines Custom engines
Engines produced 3,000 2,500 500
Machine hours 6,000 4,800 1,200
Batches of products 200 100 100

DMC has used machine hours in the past to allocate all overhead costs. Which of the following statements is true given the data above, if DMC used machine hours as the allocation base for the current year?

a. DMC under allocated overhead costs to the standard engines.
b. DMC paid more for overhead costs than if it used activity-based costing.
c. DMC over allocated the overhead costs to the standard engines.

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tallinn tallinn · Answer 1 · 2021-07-23T05:05:05+02:00

Answer:

Hence the correct option is option c. DMC over-allocated the overhead costs to the standard engines.

Explanation:

DMC over-allocated the overhead costs to the quality engines

All overheads have now been allocated within the ratio of machine-hours used i.e. 4:1

If however, ABC system were used, overheads associated with found out would are allocated within the ratio of batches i.e. 1:1

And hence, more overheads would are allocated to custom engines and fewer to plain engines.

The amount purchased overheads will remain equivalent. The systems are only used for the allocation of overheads.