Cooper's Bags Company manufactures cloth grocery bags to be sold to grocery stores and other retailers. Cooper's Bags Company sells the bags in cases of 800 bags. The bags come in three sizes: Large, Medium, and Small. Currently, Cooper's Bags Company uses a single plantwide overhead rate to allocate its $8,373,000 of annual manufacturing overhead. Of this amount, $2,160,000 is associated with the Large Bag line, $3,414,000 is associated with the Medium Bag line, and $2,799,000 is associated with the Small Bag line. Cooper's Bags Company is currently running a total of 41,000 machine hours: 12,700 in the Large Bag line, 16,300 in the Medium Bag line, and 12,000 in the Small Bag line. Cooper's Bags Company uses machine hours as the cost driver for manufacturing overhead costs. Which product line(s)have been overcosted or undercosted by using the plantwide manufacturing overhead rate?

Question

Quizplus · Accepted Answer

Since the plantwide overhead rate uses a single rate to allocate overhead costs to all product lines, it does not consider the differences in the amount of manufacturing overhead costs and the machine hours used by each product line. As a result, product lines with lower manufacturing overhead costs and machine hours, such as Large Bags, are undercosted while product lines with higher manufacturing overhead costs and machine hours, such as Medium and Small Bags, are overcosted. Therefore, choice D is the best answer.

Cooper's Bags Company Manufactures Cloth Grocery Bags to Be Sold