Gregory Enterprises Has Identified Three Cost Pools to Allocate Overhead

question 25

Multiple Choice

Gregory Enterprises has identified three cost pools to allocate overhead costs.The following estimates are provided for the coming year: $$\begin{array} { l r l r } \text { Cost Pool } & \text { Overhead Costs } & \text { Cost driver } & \text { Activity level } \\\text { Supervision of direct labor } & \$ 320,000 & \text { Direct labor-hours } & 800,000 \\\text { Machine maintenance } & \$ 120,000 & \text { Machine-hours } & 960,000 \\\text { Facility rent } & \$ 200,000 & \text { Square feet of area } & 100,000 \\\text { Total overhead costs } & \$ 640,000 & &\end{array}$$ The accounting records show the Mossman Job consumed the following resources:
$$\begin{array}{ll}\text { Cost driver } & \text { Actual level } \\\text { Direct labor-hours } & 200 \\\text { Machine-hours } & 1,600 \\\text { Square feet of area } & 50\end{array}$$ 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.

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Definitions:

T-test

A statistical test used to compare the means of two groups to determine if there is a significant difference between them.

Null Hypothesis

The default assumption that there is no significant difference or effect, serving as the claim that the study seeks to test or refute.

F-ratio

A statistical measure used in the analysis of variance (ANOVA) to compare the variance between groups with the variance within groups.

F-ratio

A statistical measure used in the analysis of variance (ANOVA) to determine the ratio of variance between groups to the variance within groups.