ACCT 2301 Chapter Notes -Tomato Soup, Direct Labor Cost, Cost Driver
4 Feb 2014
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Chapter 5 cost management in an automated business. In the past, manufacturing process was labor intensive with minor overhead cost. It was rational to use labor hour as the allocation base. Although it wasn"t perfect, misallocation of overhead cost was not a big deal because it was overhead cost was so minor. Labor hours is no longer an effective allocation base and overhead cost is much greater. Misallocation will create large distortions on the cost of cost objects. Effects of automation on selecting a cost driver. Ex new machinery increased overhead from to . New machinery shorted the hours for job 2. Allocation of overhead using labor hour as allocation base. More overhead costs should have been allocated to job 2 b/c automating the production of job 2 caused costs to increase. One way to solve the problem is to use machine hours as cost.
