At the start of the year, Pelton estimates that the company will incur $60,0000 of overhead, $6,000,000 of direct labor and 600,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses.
Direct material $3,000 $3,500
Direct Labor $900 $1,200
Machine Hours 100 100
A) Calculate the cost of civilian and military versions of Model KV10 using both direct labor dollars and machine hours as alternative allocation bases.
B) Explain why Pelton Instruments may decide to use direct labor as an overhead allocation base.
C) Is it ethical for Pelton to select an allocation base that tends to allocate more of overhead costs to government contracts? Explain.
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