1 - SOLUTIONS TO CASES FOR MANAGEMENT DECISION MAKING CASE...

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© 2008 For Instructor Use Only Case 1-1 SOLUTIONS TO CASES FOR MANAGEMENT DECISION MAKING CASE 1 1. A predetermined manufacturing overhead rate means that all manufac- turing overhead costs, as defined by generally accepted accounting principles (GAAP), are allocated to each job based on a cost driver. Often this is done based on the expected volume of units produced. That is, products that are produced in higher volume are allocated more overhead. In the case of Wall Décor, in addition to volume sold, the base used is the cost of each print sold. That is, each print is allocated an amount of manufacturing overhead based on the cost of the print. The manage- ment of Wall Décor felt that this approach was logical because it was expected that more expensive prints would be more likely to be framed, and that the processing of framing requires the incurrence of considerably more overhead costs. 2. The advantages of using the cost of each print as the manufacturing overhead cost driver are that: (1) it is relatively inexpensive to implement in a business, (2) it is easy to explain, and (3) it keeps accounting records in compliance with GAAP. The primary disadvantage of using the cost of each print as the manu- facturing overhead cost driver is that it may not result in a reasonable estimate of the cost of a job, batch, or service. That is, the assumed relationship—that the cost of the print is related to the amount of
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1 - SOLUTIONS TO CASES FOR MANAGEMENT DECISION MAKING CASE...

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