question archive Asian Tools, a manufacturer of precision hand tools, is concerned with the apparent lack of controls over cost incurrence in its Hand Tool Division
Asian Tools, a manufacturer of precision hand tools, is concerned with the apparent lack of controls over cost incurrence in its Hand Tool Division
Subject:AccountingPrice: Bought3
Asian Tools, a manufacturer of precision hand tools, is concerned with the apparent lack of controls over cost incurrence in its Hand Tool Division. The division has always used a plant-wide rate for allocating manufacturing overhead to its products. However, some products cost substantially more than competitors' retail prices while others arc substantially less. The division manager believes that a better cost allocation method can be developed. With the assistance of a plant supervisor, the accounting department has been able to establish the following relationship between production activities and the indirect costs of the activities:
|
Activity |
Cost Driver |
Allocation Rate |
|
Material handling |
Number of parts |
$ 2.60 per part |
|
Machine stamping |
Machine hours |
$ 60.00 per hour |
|
Finishing |
Time tool is at work station |
$ 4.00 per minute |
The traditional allocation method is based upon direct manufacturing labor hours and, if that method is used the rate is $28 per hour.
Required:
Compute the unit indirect manufacturing cost of a batch of 200 tools if the batch required 220 parts, 8 machine hours, 52 minutes of finishing time, and 46 direct labor hours:
a. Using the traditional allocation method
b. Using the activity base method.
