Cost Allocation Methods at Acme Company

What is the current overhead rate used by Acme Company?

a) $15 per machine hour
b) $20 per machine hour
c) $25 per machine hour

Answer:

The current overhead rate used by Acme Company is $20 per machine hour (option b).

Acme Company utilizes a single plantwide overhead rate of $20 per machine hour to allocate overhead costs in its current system. This means that for every hour a machine is in use, $20 of overhead costs are allocated to it. This method simplifies the allocation process but may not accurately reflect actual overhead consumption by different activities.

By using a single plantwide overhead rate, Acme Company may face challenges in accurately attributing overhead costs to specific products or services. This could result in inaccurate cost calculations and decision-making.

It is important for companies to consider alternative cost allocation methods, such as Activity-Based Costing (ABC), to ensure more precise and relevant allocation of costs. ABC systems allocate overhead costs to different activities or cost centers based on their consumption of resources, leading to more accurate cost information for decision-making purposes.