QUESTION 3 [20 POINTS] 1. In a shipping department, the indirect costs are to be allocated using machine hours as the co

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Question 3 20 Points 1 In A Shipping Department The Indirect Costs Are To Be Allocated Using Machine Hours As The Co 1 (144.98 KiB) Viewed 52 times

QUESTION 3 [20 POINTS] 1. In a shipping department, the indirect costs are to be allocated using machine hours as the cost driver. The shipping department's total indirect costs = $300,000 and it expects to use 25,000 machine hours for the period. If product X needs 2,000 machine hours, how much will it be allocated the shipping department's indirect cost? Show your calculation. (5 points) 2. Sally Arnold produces a range of products through several processes. Total overhead costs for process A are $400,000 and overhead is allocated to units of product on the basis of $6 of overhead for each hour of direct labour employed. If 7,000 units of product Y pass through process A, requiring 3,500 direct labour hours, what is the overhead from process A to be applied to product Y? Show you calculation. (5 points) 3. Read the following excerpt about cost allocation at IBM and answer the following questions: a. Discuss the weakness(es) of the cost allocation system related to R&D used by IBM and how you would improve it. (5 points) b. Do you agree with IBM's policy to allocate costs from one line of business to another? Justify your answer. (5 points)

During the 1980s and early 1990s, IBM had the policy of allocating costs from one line of business to another. Managers in those lines of business constantly argued that some of their overhead should be carried by other IBM businesses. IBM also typically allocated all of the R&D of a new technology to the line of business first using the tech- nology, and subsequent users were able to utilize it for free. The cost allocation system masked the true profitability of many IBM businesses for years. IBM claimed it was making money in its PC business. But in 1992, "as IBM began to move away from its funny allocation system, IBM disclosed that its PC business was unprofitable." In 2004, IBM sold its PC division to China-based Lenovo Group for $1.75 billion. SOURCES: P. Carroll, "The Failures of Central Planning-at IBM," The Wall Street Journal, January 28, 1993, p. A14; "IBM Sells PC Business to China's Lenovo," AP, December 8, 2004.