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4-B2 Allocation, Department Rates, and Direct-Labor Hours Versus Machine Hours The Hernandez Manufacturing...

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Accounting

4-B2 Allocation, Department Rates, and Direct-Labor Hours Versus Machine Hours
The Hernandez Manufacturing Company has two producing departments, machining and assembly. Mr. Hernandez recently automated the machining department. The installation of a CAM system, together with robotic workstations, drastically reduced the amount of direct labor required. Meanwhile, the assembly department remained labor intensive. The company had always used one firm-wide rate based on direct-labor hours as the cost-allocation base for applying all costs (except direct materials) to the final products. Mr. Hernandez was considering two alternatives: (1) continue using direct-labor hours as the only cost-allocation base, but use different rates in machining and assembly, and (2) using machine hours as the cost-allocation base in the machining department while continuing with directlabor hours in assembly. Budgeted data for 20X0 are as follows:
\table[[,Machining,Assembly,Total],[Total cost (except direct materials),$540,000,$494,000,$1,034,000
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