Question

Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. Hair by Zeus Bottle Batch Cost per January's other expenses Oil, fl. oz. 2 $3 Supervision $8,000 Lotion, fl. oz. 4 $1 Indirect materials $2,200 Zeus potion, fl. oz. 1/4 $24 Equipment deprec & repairs $14,520 Alcemena scent 1/16 $48 Plant manager's salary $6,500 Bottle, cap, label 1 $0.4 Utilities $1,800 Direct labor, hour 50 $14 $33,020 Machine hours 8 Why is actual costing of overheads less accepted than normal costing? It is impossible to determine overheads per job until the end of the year Monthly allocation of actual overheads leads to unusually low or high product costs when monthly output differs from the annual average It exacerbates the problem of under/over applied overheads Actual costing is widely used in practice (a) and (b) only

Answer 1

a. Correct

Since it is correct to say that generally overheads amount cannot be determined in the beginning or during the production process, it is determined only in the end of the year, hence actual costing is not able to apply here.

b. Correct

If the actual monthly overheads are allocated then this may lead to unusually high or low product cost, which might be unusual than expected and planned for.

c. Incorrect

Normal costing creates and doesn't exacerbates the problem of under/over applied overheads.

d. Incorrect

Since Normal costing is widely used in practice.

(a) and (b) only