Question

Guerra Electronics manufactures a variety of electronic gadgets for use in the home. Which of the following would probably be the most accurate measure of activity to use for allocating the costs of inspecting the finished products at Guerra? a.Direct labor-hours b.Inspection time c.Number of inspections d.Machine hours

Answer 1

Answer: b. Inspection time

Explanation: Overhead allocation is required under the rules of various accounting frameworks and is defined as the apportionment of indirect costs (costs used by multiple activities which cannot be assigned to specific cost objects) to produced goods. Overhead allocation is quite significant because often times, it is substantially greater than the direct cost of goods.

The time spent for inspection which is vital to controlling quality, reducing manufacturing costs, eliminating losses and assigning causes of defective work etc. would be the most accurate measure of activity to use for allocating the costs of inspecting finished products as it is included in manufacturing overhead.