The best method of allocating overhead costs to reflect actual consumption of services is <em>C. Three activity cost drivers because they best reflect the relative consumption of resources. </em>
Activity-based costing method of overhead allocation uses overhead cost pools and cost drivers and reflects the actual consumption of production activities by each job or process.
Data and Calculations:
Cost Pool Overhead Costs Cost driver Activity level
Supervision of direct labor $320,000 Direct labor hours 800,000
Machine maintenance $120,000 Machine hours 960,000
Facility rent $200,000 Square feet of area 100,000
Total overhead costs $640,000
Overhead Rates:
Supervision of direct labor = $0.40 per direct labor hour ($320,000/800,000)
Machine maintenance = $0.13 per machine hour ($120,000/960,000)
Facility rent = $2.00 per square feet ($200,000/100,000)
Mossman Job:
Cost driver Actual level Overhead Allocated
Direct labor hours 200 $80 ($0.40 x 200)
Machine hours 1,600 208 ($0.13 x 1,600)
Square feet of area 50 100 ($2.00 x 50)
Total overhead allocated $388
Thus, with Activity-based costing method, only $388 is allocated to the Mossman Job because the costs allocated are based on three cost drivers and the level of activity consumed by the job.
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