Alternative Course of Action (ACA)1

1st Method (Single Cost Center) - Uniform plantwide labor and overhead costs alocated to product cost based on Direct Labor Hours

PROS

Easy to implement

CONS

inaccurate product costing, that is, underutilized and low-cost department absorbs cost from high cost department

no possibility to identify cost drivers, control costs and identify losing products

inventory is undervalued

underutilized department will absorb cost

Alternative Course of Action 2

2nd Method (Multiple cost centers) - Assign Direct Costs to respective departments & allocate overhead costs based on space size occupied by machines in the plant

ROS

proportionate (not necessarily accurate) allocation of Overhead costs

provides rational basis for pricing

inventories are better valued

CONS

disregards volume of output (level of utility consumed) and high utility costs of machines in departments with minimal space usage

no possibility to identify cost driver, control cost and losing product

Alternative Course of Action 3

3rd Method (Multiple Cost Centers) - Assign Direct Costs to respective departments & allocate Overhead Costs based on production level of machinery

PROS

proportionate (not necessarily accurate) allocation of Overhead costs

provides rational basis for pricing

inventories are better valued

CONS

disregards volume of output (level of utility consumed) and high utility costs of machines in departments with minimal space usage

no possibility to identify cost driver, control cost and identify losing products

Statement of the Problem: How would Huron Automotive Company allocate costs without undermining the profitability of each departments?

Areas of Consideration

Bond’s concern of the current costing system

•Its adequacy for purposes of cost control

•Its accuracy in arriving at the true costs of products

•Its usefulness in providing data to judge supervisors’ performance