Question

1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the Standard Guest Room and the Junior Suite, because over 90 percent of the models produced were one of these two models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. 2. How would the use of more than one cost pool improve Choice Hotels’ cost allocation? 3. Choice Hotels' production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations. Choice Hotels Sales, Production, and Cost Information
Room Type	Standard Guest Room	Junior Suite	Presidential Suite		Type	Cost
Volume	150	110	25		Depreciation	$3,200,000
Price	$140,000	$240,000	$1,050,000		Maintenance	$1,800,000
Unit costs					Purchasing	$320,000
Direct materials	$30,000	$92,000	$310,000		Inspection	$850,000
Direct labor	$54,000	$85,000	$640,000		Indirect materials	$490,000
Manufacturing	$30,000	$30,000	$30,000		Supervision	$1,700,000
overhead					Supplies	$190,000
Total unit cost	$114,000	$207,000	$980,000		Total manufacturing overhead cost	$8,550,000
Unit gross profit	$26,000	$33,000	$70,000		Note: Manufacturing overhead costs are fixed. They do not vary with the volume of manufacturing activity.
Direct labor hours	1,200	1,300	5,940
Rate per hour	$45.00	$65.38	$107.74

Answer 1

1.

Particulars	Standard Guest Room	Junior Suite	Presidential Suite	Total
Volume	150	110	25	285
Volume in %	53%	39%	9%	100%
Manufacturing O/D Cost	$                4,500,000.00	$ 3,300,000.00	$            750,000.00	$ 8,550,000.00

As mentioned in given case,
The Manufacturing overhead costs are fixed. They do not vary with the volume.
The allocation of overheads should not be based on volume because it not directly associated with how much models produced.
So, It is not an accurate way to assign overhead costs to products.

2.

Cost pool means grouping of costs incurred on a particular activity.
The manufacturing overheads are associated with activities that grenerates it.
So, for determining correct overhead absorption rate, it is important to divide cost pools with correct cost drivers.
If there is only one cost pool, then there will be difficulties in selecting one correct cost driver as there may be diffenent kind of cost activities which generate the cost.
Use of more than one cost pool help to determine correct overhead apsorption rate. In such case, cost pool can be divided by correct and more relevant cost driver.

3.

Particulars	Standard Guest Room	Junior Suite	Presidential Suite	Total
Volume in units (A)	150	110	25	285
Direct Labour Hours (B)	1200	1300	5940	8440
Manucaturing o/d Cost (D) [B x C)	$ 1,215,639.81	$ 1,316,943.13	$ 6,017,417.06	$ 8,550,000.00
Allocation rate per hour (C)				$ 1,013.03
(Total Overhead / Total Hours)
Manucaturing o/d Cost per unit (D / A)	$ 8,104.27	$ 11,972.21	$ 240,696.68