Question

Big Red Company, a manufacturer of computer hardware components, uses direct labor cost to allocate its production overhead. In its hard-drive division, it allocates $12.50 per direct labor hour as the standard rate. The overhead includes supervision and machine setup cost. SCSI and SATA drives take the same time to produce, but the setup time for SATA is three times as long as the setup time for SCSI. Which statement is true about overhead allocation for the two drives?
А SATA carries more than its full share of factory overhead.
B Overhead allocation is fair for both drives.
C. SATA carries less than its full share of factory overhead.
D Overhead allocation cannot be directly related to products.

Answer 1

Answer:

Option C is correct.

Explanation:

Big Red Company allocates $12.50 per direct labor hour as the standard rate and uses direct labor cost to allocate its production overhead.

However, he setup time for SATA is three times as long as the setup time for SCSI although SCSI and SATA drives take the same time to produce.

This shows that SATA carries less than its full share of factory overhead.