In a manufacturing company, overhead allocations are made for three reasons: (1) to determine the full cost of a product; (2) to encourage efficient resource usage; and (3) to compare alternative courses of action for management purposes.
a. Why must overhead be considered a product cost under generally accepted accounting principles?
b. Ryan Company makes plastic dog carriers. The manufacturing process is highly automated and the machine time needed to make any size crate is approximately the same. Ryan’s management decides to begin producing plastic lawn furniture and, to do so, two additional pieces of automated equipment are acquired. Annual depreciation on the new pieces of equipment is $38,000. Should the new overhead cost be allocated over all products manufactured by Ryan? Explain.
c. What one specific reason would make the use of a normal cost system more logical for a business located in Michigan than for one located in Hawaii?