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Allocate FOH as function of Direct Material or Direct Labor

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Question - Truthful Reporting produces two products. "A" and "B".

The consumption of labor and materials, production units, and sales for the year are represented in the following table:

Product A

Product B

DL (hours/unit)

3

10

DM (lbs/unit)

20

10

Units Produced

50

70

Units Sold

40

35

Sale Price

$250

$300

The company also incurred $3,400 of fixed manufacturing overhead to produce the two products. The company pays a wage rate of $15/hour and pays $5/lb of material. It is company policy to allocate fixed overhead on the basis of lbs of direct material. The company uses actual full absorption costing. For purposes of this problem, assume there are no other non-manufacturing expenses.

Required -

If you were the manager of Product B, and your bonus was based on the reported income of Product B, you would prefer to allocate FOH as a function of Direct Material or Direct Labor?

If you were the manager of Product A, and your bonus was based on the reported income of Product A, you would prefer to allocate FOH as a function of Direct Material or Direct Labor?

If you were the manager of the entire business and were compensated as a function net income, you would prefer to allocate FOH as a function of Direct Material or Direct Labor?

Reference no: EM131763979

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