Which would be an appropriate cost driver for the shipping and receiving activit

Question

Which would be an appropriate cost driver for the shipping and receiving activity? Number of inspections number of machine hours number of batches number of pounds of product shipped Louie's Music Co. produces three types of harmonicas: the junior model, the standard model and the professional model. The junior model requires 8 setups, the standard model requires 12 setups and the professional model requires 20 setups. The company expects to Incur overhead costs of dollar 28,000 where the cost driver is machine setups. How much overhead is assigned to each product? Which of the following is an advantage of decentralization? Managers' motivation and retention can be increased by empowering segment managers to make decisions. Certain costs of activities may be duplicated. Customer response time is generally decreased. Top management can concentrate on decisions that relate to day-to-day operations of segments.

Explanation / Answer

Part 1)

Number of Pounds of Product Shipped. (which is Option D)

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Explanation:

The costs relating to shipping and receiving activity have to allocated on the basis of units that are shipped and received. Out of all the options provided in the question, the most appropriate cost driver would be number of pounds of product shipped as pound will be used as a unit to allocate the cost to different products.

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Part 2)

To allocate the overhead, we need to calculate the activity rate as follows:

Activity Rate = Total Overheads/Total Machine Setups = 28,000/(8 + 12 + 20) = $700 per setup

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The overhead assignment is shown below:

Overhead Allocated to Junior Model = 8*700 = $5,600

Overhead Allocated to Standard Model = 12*700 = $8,400

Overhead Allocated to Professional Model = 20*700 = $14,000

Option C (Junior Model - $5,600, Standard Model - $8,400 and Professional Model - $14,000) is the answer

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Part 3)

Managers' motivation and retention can be increased by empowering segment managers to make decisions (which is Option A)

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Explanation:

With decentralization, the top management can distribute the authority of making decisions to segment managers. This allows the management to focus on key and critical business activities rather than gettiing engaged in day to day business operations. When managers are entrusted with the responsibility to make decisions, they feel that their contributions are valued in the organization which in turn helps in boosting their morale and keeping them motivated to work in the best interests of the organization. Improved motivation also helps in reducing the level of attrition within the company.

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