Concept explainers
To identify: The situation in which cost distortion is more likely to occur.
Answer to Problem 1QC
Option b. Cost distortion is more likely to occur when departments incur different types of
Explanation of Solution
Cost distortion occurs when some products or jobs are overcosted while others are undercosted under simple allocation system. And this occurs because department incur different types of overhead and the products or jobs use the department resources in different quantities.
a.
A company manufactures one type of product: This is an incorrect option as the cost distortion does not occur when there is a single product manufactured by the entity.
b.
Departments incur different types of overhead and the products or jobs use the department to a different extent: This option is correct because cost distortion is the result of different types of overheads incurred by various departments.
c.
A company uses departmental overhead rates rather than a single plantwide overhead rate: This option is incorrect as the use of departmental overhead rate in the place of the single plantwide overhead rate will not distort the cost in any manner.
d.
All products require the same amount and type of
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Chapter 4 Solutions
Managerial Accounting (4th Edition)
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