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Chapter 17: Q. 13RQ (page 938)

What is an allocation base? Give some examples

Short Answer

Expert verified

The allocation base is the denominator that links the overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead. Direct labor hours, machine hours, direct labor cost are the examples of the allocation base.

Step by step solution

01

Machine hours

Machine hours is a measurement used to apply the overheads to the manufactured goods of the company. It is the method of absorption of the overheads incurred by the company.

02

Allocation base

Allocation base is define as the denominator used while computing the predetermined overhead allocation rate. It divides the total overhead cost on per unit basis. Machine hours, labor hours can be used as the allocation base.

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Most popular questions from this chapter

Question: Explain the journal entry for the allocation of overhead. What accounts are affected? Are they increased or decreased?

Question: Give the journal entry for raw materials purchased on account. Explain how this transaction affects the accounting equation.

For the following accounts, indicate what causes the account to increase and decrease. The first account is completed as an example.

Account

Is increased by:

Is decreased by:

Raw material inventory

Material purchased

Material used

Work in process inventory

Finished goods inventory

Cost of goods sold

Jerry never imagined he鈥檇 be sitting there in Washington being grilled mercilessly by a panel of congressmen. But a young government auditor picked up on his scheme last year. His company produced high-tech navigation devices that were sold to both military and civilian clients. The military contracts were 鈥渃ost-plus,鈥� meaning that payments were calculated based on actual production costs plus a profit markup. The civilian contracts were bid out in a very competitive market, and every dollar counted. Jerry knew that because all the jobs were done in the same factory, he could manipulate the allocation of overhead costs in a way that would shift costs away from the civilian contracts and into the military 鈥渃ost-plus鈥� work. That way, the company would collect more from the government and be able to shave its bids down on civilian work. He never thought anyone would discover the alterations he had made in the factory workers鈥� time sheets, but one of his accountants had noticed and tipped off the government auditor. Now, as the congressman from Michigan rakes him over the coals, Jerry is trying to figure out his chances of dodging jail time.

Requirements

  1. Based on what you have read above, what was Jerry鈥檚 company using as a cost driver to allocate overhead to the various jobs?
  2. Why does the government consider Jerry鈥檚 actions fraudulent?
  3. Name two ways that reducing costs on the civilian contracts would benefit the company and motivate Jerry to commit fraud.

Back Country manufactures backpacks. Its plant records include the following materials-related data

Journalize the entries to record the transactions, post to the Raw Materials Inventory account, and determine the ending balance in Raw Materials Inventory.
See all solutions

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