Question

no. 1 O. 100% Tables Charts SmartArt Paragraph Styles MEHE 22 - CE A: EE20ENJA List Paragraph 1121 WALL 1. Estimated cost and operating data for the forthcoming period for three companies are given below: Estimated cost and operating data for the three companies are given below: Company A Company B Company C Direct labor hours 12,000 15,000 20,000 Manufacturing overhead $90,000 $120,000 $150,000 Machine hours 20,000 20,000 25,000 Direct labor cost $60,000 $ 75,000 $100,000 Actual cost and operating data for the three companies are given below: Company A Company B Company C Direct labor hours 10,000 15,500 16,000 Manufacturing overhead $95,000 $100,000 $175,000 Machine hours 21,000 19,000 30,000 Direct labor cost $55,000 $80,000 $90,000 You have been hired to assist Company A, Company B, and Company C design the most effective manufacturing overhead allocation system for each company. You must choose one activity base for each company. You must support your decision.

Answer 1

In all the three companies, the manufacturing overheads and machine hours are positively correlated between budget and actuals while the manufacturing overheads and labour hours are negatively correlated. This means that as machine hours increase in actuals and labour hours decrease in actuals, manufacturing overheads increase in actuals. The vice versa, i.e. as machine hours decrease in actuals and labour hours increase in actuals, manufacturing overheads decrease in actuals.

So machine hours is the activity base for all the three companies.