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McLusky Corp makes and sells two types of imaging devices used by medical professionals: MRI scanners and PET scanners. The scanners are made in
McLusky Corp makes and sells two types of imaging devices used by medical professionals: MRI scanners and PET scanners. The scanners are made in McLusky's two business units. In the Manufacturing Division, the base scanners are manufactured in a highly automated production process. In the Customization Division, the scanners are customized to client specifications and thoroughly tested. McLusky uses normal absorption costing to compute scanner costs. Overhead (OH) costs are applied to products using divisional cost pools and overhead rates. In the Manufacturing Division, OH is applied using Machine Hours (MHS). In the Customization Division, OH is applied using Direct Labor Hours (DLHS). OH rates are rounded to the nearest dollar. The following divisional operating and financial data - estimates prepared on 1/1/2020 and actuals prepared after close of business on 12/31/2020 - are available for 2020: Manufacturing Division Customization Division Estimates Actuals Estimates Actuals Direct Materials Cost $7,660,000 $7,836,000 $880,000 $895,000 Direct Labor Cost $940,000 $988,000 $2,680,000 $3,011,000 Direct Labor Hours Machine Hours 36,200 48,600 38,634 48,624 103,100 116,024 10,900 11,024 Overhead $6,340,000 $6,788,000 $4,990,000 $4,875,000 McLusky Corp's controller is an expert in designing internal reporting systems. The controller is convinced that the divisional allocation bases are appropriate and more accurate than alternatives. How would we verify whether the controller is correct (i.e., what determines whether an allocation base is appropriate and results in accurate estimates)?
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