Question

Wood Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are made by hand. Wood Company uses a companywide overhead rate that is based on direct labor hours to assign overhead costs to the two products. If Wood Company automates the production of straight-back chairs and continues to use direct labor hours as a companywide allocation basis:

a. rocking chairs will be undercosted
b. there should be no impact on unit cost
c. straight back chairs will be overcosted
d. rocking chairs will be overcosted.

Answer 1

Answer:

d. rocking chairs will be overcosted.

Explanation:

Since in the given situation, if the company automates the production of straight-back chairs so the direct hours of straight back chairs will be decreased and the rocking chairs would remain constant and we assume that overall overhead remain the same

In addition, Overall Direct working hours would minimize the proportion of Direct rocking chair working hours in total direct working hours. As a result, the overhead allocation to the Rocking chair would also increase on the basis of Direct Labor hours than before. And it would overcoat the rocking chairs.

Hence, the correct option is d.