Chapter 4, Problem 1QC

(Learning Objective 1) Cost distortion is more likely to occur when

1. a. departments incur different types of overhead and the products or jobs use the departments to a different extent.
2. b. a company manufactures one type of product.
3. c. all products require the same amount and type of processing activities.
4. d. a company uses departmental overhead rates rather than a single plantwide overhead rate.

To determine

To identify: The situation in which cost distortion is more likely to occur

Answer to Problem 1QC

Option a.  Cost distortion is more likely to occur when departments incur different types of overhead and the products or jobs use the department to a different extent.

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.

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.

b.

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.

c.

All products require the same amount and type of processing activities: Cost distortion will not take place if the amounts of all products are same and type of processing activities is also same. Hence, the choice is incorrect.

d.

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.