EXERCISE 5-12 (30 MINUTES)

10,000

0

0

2,000

4,000

6,000

8,000

10,000

Direct Labor-Hours

In general, the allocation base should actually cause the cost being allo-cated. If it doesn’t, costs will be incorrectly assigned to jobs. Incorrectly assigned costs are worse than useless for decision-making. Looking at the above scattergraph, electrical costs do not appear to be related to direct labor-hours. Electrical costs do vary, but apparently not in response to changes in direct labor-hours. On the other hand, looking at the scattergraph for machine-hours, there is some tendency for elec-trical costs to increase as the machine-hours increase. So if one must

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Solutions Manual, Chapter 5

251

Case 5-25 (continued) choose between machine-hours and direct labor-hours as an allocation base, machine-hours seems to be the better choice. Even so, it looks like little of the overhead cost is really explained even by machine-hours. Electrical cost has a large fixed component and much of the variation in the cost is unrelated to machine hours.