Miller Company makes two types of chairs.One of the chairs is a rocking chair.The other is a straight-back chair.Both chairs are made by hand.Miller Company uses a companywide overhead rate that is based on direct labor hours to assign overhead costs to the two products.If Miller automates the production of straight-back chairs and continues to use direct labor hours as a companywide allocation basis:
A) rocking chairs will be overcosted.
B) straight-back chairs will be overcosted.
C) rocking chairs will be undercosted.
D) there should be no impact on unit cost.

Question

Quizplus · Accepted Answer

BWhen Miller automates the production of straight-back chairs, the direct labor hours for these chairs will decrease significantly. However, if the company continues to use direct labor hours as the basis for allocating overhead, the overhead costs assigned to the straight-back chairs will be disproportionately low relative to their actual consumption of overhead resources. Consequently, a larger portion of the overhead costs will be allocated to the rocking chairs, which still rely heavily on manual labor. This will result in the rocking chairs being overcosted (as they are allocated more overhead than they should be) and the straight-back chairs being undercosted (as they are allocated less overhead than they should be).

Miller Company Makes Two Types of Chairs