Question

Sip Organics is a cold-pressed juice manufacturer that creates special wellness juices. As the budget accountant in the new processing department, you are given the task of identifying direct and indirect costs of each new cold-pressing machine. The controller has asked that you classify the majority of the juicer and department costs as indirect. Classifying the majority of costs will allow you to use the direct labor-based overhead allocation method. Using this method will also charge a lower amount of overhead as long as the costs are smaller direct labor costs.

As the accountant, you have realized that classifying the majority of the costs as indirect will cause a penalty for other departments that typically have larger allocations. These same departments will have lower performance ratings as a result of the change in classification.

• Share how you would handle this situation to be sure that classifying the majority of the costs does not cause penalties for other departments that have larger allocations.

Answer 1

Ans. Sip Organics is a cold-pressed juice manufacturer that creates special wellness juices. As the budget accountant in the new processing department, you are given the task of identifying direct and indirect costs of each new cold-pressing machine. Classifying the majority of costs will allow you to use the direct labor-based overhead allocation method.

As the accountant of the company, I would resort to Activity Based Costing (ABC) as this would provide a more prudent estimates of fixed cost and their allocation thereof.