Traditional allocation system

1. What two conditions must be met for a company to recognize revenue?

2. Define a cash equivalent value.

3. What two contra accounts are related to sales and what is the purpose of each?

Under a traditional manufacturing overhead allocation system, a company simply estimates total manufacturing overhead for the company and selects a cost driver, typically direct labor hours or machine hours. The predetermined overhead rate is the total estimated overhead divided by the total estimated direct labor hours (machine hours). This system is obviously much easier because only one manufacturing overhead allocation must be done rather than the various allocations we made using ABC.

Discuss the ethical implications to the traditional allocation system if the company has different managers in charge of different, widely diverse product lines.


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