The Controller of Alaska Company Is in Charge of Installing

question 109

Essay

The controller of Alaska Company is in charge of installing a new costing system which includes the allocation of indirect manufacturing costs to the producing departments. After studying the situation, he found that there were three cost drivers that could be used to assign the indirect costs, each with its own merits. After computing the allocations for the departments on a sample month, he found that each cost driver favored (i.e., assigned less costs to) a different department. Machine hours favored Department X, direct manufacturing labor hours favored Department Y, and number of processing steps performed favored Department Z.
Required:
What additional factors must the controller consider before deciding on an allocation base for the indirect manufacturing cost assignment to the departments?

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Definitions:

Pro Forma Assets

Projected assets of a business, listed in a financial statement prepared in anticipation of future events or transactions.

Owner's Equity

The residual interest in the assets of an enterprise after deducting its liabilities, often referred to as net assets.

Long-Term Assets

Assets that are expected to provide economic value to a business for more than one year, such as property, plant, and equipment.

Economic Climate

The overall state of the economic environment, characterized by factors such as growth rates, unemployment, inflation, and consumer confidence.