Murphy Company builds custom sailboats. Murphy currently has three boats under construction. The estimated costs to complete each boat are shown below:

Murphy expects to incur $48,000 of indirect (overhead) costs in the process of making the boats.
Required
a. Based on the information provided, name four allocation bases that could be used to assign the overhead costs to each boat.
b. Assume that the production manager of each boat is permitted to recommend how the overhead costs should be allocated to the boats. Which of the allocation bases named in Requirement a is the manager of Boat 2 most likely to recommend? Explain why. What argument may the manager of Boat 2 use to justify his choice of the allocation base?
c. Which of the allocation bases would result in the fairer allocation of the overhead costs from the perspective of the company president?
d. Explain how classifying overhead costs into separate pools could improve the fairness of the allocation of the overhead costs.

Transcribed Image Text:

Boat 1 Boat 2 Boat 3 Direct materials $25,000 $32,000 $12,000 22,000 20,000 14,000 Direct labor