EXERCISE
Cales Instrumentation manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus profit basis with profit equal to 10 percent of cost.
Instruments used in military applications require more direct labor time because "fail-safe" devices must be installed. (These devices are generally omitted in civilian applications.)
At the start of the year, Cales estimates that the company will incur $50,000,000 of overhead, $5,000,000 of direct labor, and 500,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses:
|
Civilian
|
Military
|
|
Direct material
|
$2,000
|
$2,500
|
|
Direct labor
|
$600
|
$900
|
|
Machine hours
|
80
|
80
|
Required:
Calculate the cost of civilian and military versions of Model KV10 using both direct labor dollars and machine hours as alternative allocation bases.
Explain why Cales Instruments may decide to use direct labor as an overhead allocation base.
Is it ethical for Cales to select an allocation base that tends to allocate more of overhead costs to government contracts? Explain.