Multiple Choice

The shipping department is a service department for Ajax company that manufactures 2 products: scouring powder sold in shaker cans and a liquid detergent sold in 5-pound pails. The plant accountant is considering what the allocation base should be used for the shipping department cost to each of the products as shipping costs are a significant part of the company's costs and vary by product. The shipping department supervisor has indicated that the quantity of shipments is what drives his department cost. So the plant accountant wants to use that as the cost allocation base. But the plant manager likes consistency and asked if direct labor hours would make the costing process easier. Which of the following is the best explanation the plant accountant should use in discussion with the plant manager?

A. I have studied the costs of the shipping department. The number of shipments has been determined to be the driver of costs in the department. This was confirmed with the shipping department supervisor and as shipping costs are considerable and different by-product, the number of shipments is the best choice for the shipping department costs.

B. Because this is a service department, the easiest thing to do is allocate the costs equally.

C. I agree that the best method is using one cost driver of direct labor hours as that would be easiest.