Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

The accounting records show the Mossman Job consumed the following resources:

Which method of allocation probably best estimates actual overhead costs used? Why?
A) Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs.
B) Single direct labor-hours cost driver because it is easiest to analyze and interpret.
C) Three activity-cost drivers because they best reflect the relative consumption of resources.
D) Three activity-cost drivers because product costs can be significantly cross-subsidized.

Question

Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

The accounting records show the Mossman Job consumed the following resources:

Which method of allocation probably best estimates actual overhead costs used? Why?
A) Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs. 
B) Single direct labor-hours cost driver because it is easiest to analyze and interpret. 
C) Three activity-cost drivers because they best reflect the relative consumption of resources. 
D) Three activity-cost drivers because product costs can be significantly cross-subsidized.

Quizplus · Accepted Answer

Allocating overhead costs using three activity-cost drivers is the best choice as it reflects the relative consumption of resources by each job. Using a single direct labor-hours cost driver may not accurately capture the variation in overhead cost consumption by different jobs or products. Furthermore, using a single cost driver may result in cross-subsidization, where some products may be overcosted while others are undercosted. Allocating overhead costs using multiple activity-cost drivers will result in a more accurate allocation of costs and prevent cross-subsidization.

Gregory Enterprises Has Identified Three Cost Pools to Allocate Overhead