Kelso Manufacturing allocates manufacturing overhead using a single predetermined rate based on a planned use...
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Kelso Manufacturing allocates manufacturing overhead using a single predetermined rate based on a planned use of 15,000 direct labour hours per year. Company leadership recently learned that its costing system may be too simple for its operations, and that job costs may be fairly inaccurate. A consultant was hired to study overhead costs, and the following information reflects the cost pools and activity rates that were determined:
Job #156 required 25 purchase orders, 400 direct labour hours, 50 production runs, and 100 inspections. If a traditional costing system was used, this job would be:
a. Overcosted by $35
b. Overcosted by $80
c. Undercosted by $80
d. Undercosted by $35
\begin{tabular}{|c|c|c|} \hline Cost Pool & Total Cost & Activity Rate \\ \hline Purchasing & $90,000 & $30/ purchase order \\ \hline Assembly & $150,000 & $10/directlabourhour \\ \hline Inspection & $60,000 & $15/ inspection \\ \hline Production & $150,000 & $3/ unit produced \\ \hline Total & $450,000 & \\ \hline \end{tabular}
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