Demonstration Problem 12

Demonstration Problem 12 - Demonstration Problem 12-1...

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Demonstration Problem 12-1 Allocating Indirect Costs Assume a builder is constructing three houses simultaneously. The direct materials and direct labor costs for each house are shown below: House 1 House 2 House 3 Direct Materials $140,000 $ 70,000 $90,000 Direct Labor 210,000 130,000 60,000 Overhead ? ? ? Indirect costs such as supervisory salaries and indirect materials are $84,000. Required a. Assume the builder allocates overhead (indirect) costs equally among the three houses. Determine the amount of overhead cost allocated to each house. Comment on whether this allocation scheme is reasonable. Explain why it may be inappropriate to use number of units as the allocation base. b. Assume instead that the builder allocates overhead costs based on total direct costs. Determine the amount of overhead cost allocated to each house. Compare the allocations determined in requirement a with the allocations determined in requirement b . Identify who will benefit and who will suffer if the builder uses the requirement b allocation method instead of allocating overhead equally.
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