Question: The Hernandez Manufacturing Company has two producing departments machining and

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 direct-labor hours in assembly. Budgeted data for 20X0 are as follows:
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1. Suppose Hernandez continued to use one firm-wide rate based on direct-labor hours to apply all manufacturing costs (except direct materials) to the final products. Compute the cost-application rate that would be used.
2. Suppose Hernandez continued to use direct-labor hours as the only cost-allocation base but used different rates in machining and assembly.
a. Compute the cost-application rate for machining.
b. Compute the cost-application rate for assembly.
3. Suppose Hernandez changed the cost accounting system to use machine hours as the co st-allocation base in machining and direct-labor hours in assembly.
a. Compute the cost-application rate for machining.
b. Compute the cost-application rate for assembly.
4. Three products use the following machine hours and direct-labor hours:
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a. Compute the manufacturing cost of each product (excluding direct materials) using one firm-wide rate based on direct-labor hours.
b. Compute the manufacturing cost of each product (excluding direct materials) using direct- labor hours as the cost-allocation base, but with different cost-allocation rates in machining and assembly.
c. Compute the manufacturing cost of each product (excluding direct materials) using a cost- allocation rate based on direct-labor hours in assembly and machine hours in machining.
d. Compare and explain the results in requirements 4a, 4b, and4c.

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