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 because it reflects the relative consumption of resources. The three activities identified (machine-hours, setups, and inspection hours) are each associated with different levels of overhead cost, and allocating costs based on the specific amount of each activity used by a particular job results in a more accurate and fair allocation of overhead costs. Using a single cost driver, such as direct labor-hours, can lead to significant cross-subsidization of product costs and may not accurately reflect the actual resources consumed by a particular job.

Gregory Enterprises Has Identified Three Cost Pools to Allocate Overhead