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Pressed n' Ready is a cold pressed juice manufacturer who creates organic juices. As the...

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Accounting

Pressed n' Ready is a cold pressed juice manufacturer who creates organic juices. As the budget accountant in the new processing department, you are given the task of identifying direct and indirect costs of each new cold pressing machine. Your supervisor has asked that you classify the majority of the juicer and department costs as indirect.

Classifying the majority of costs will allow you to use the direct labor based overhead allocation method. Also using this method will charge a lower amount of overhead as long as the costs are smaller direct labor costs. You have realized that classifying the majority of the costs will cause a penalty for other departments that typically have larger allocations. These same departments will have lower performance ratings as a result of the change in classification.

Questions:

  1. Considering your understanding of job order costing and process costing, analyze how a hybrid costing system can yield different results when costs are classified as direct versus indirect?
  2. How would you handle this situation to be sure that classifying the majority of the costs does not cause penalties for other departments?

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