The Garcia Manufacturing Company has two producing departments, machining and assembly.

Mr Garcia recently automated the machining department. The installation of a CAM system, together with robotic workstations, drastically reduced the amount of direct labour required. Meanwhile, the assembly department remained labour intensive. The company had always used one firm-wide rate based on direct-labour hours as the cost-allocation base for applying all costs (except direct materials) to the final products. Mr Garcia was considering two alternatives: 

(1). Continue using direct-labour 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-labour hours in assembly. Budgeted data for 20X0 are as follows:

1. Suppose Garcia continued to use one firm-wide rate based on direct-labour hours to apply all manufacturing costs (except direct materials) to the final products. Compute the cost application rate that would be used.

2. Suppose Garcia continued to use direct-labour 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 Garcia changed the cost accounting system to use machine hours as the cost allocation base in machining and direct-labour 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-labour hours:

(a). Compute the manufacturing cost of each product (excluding direct materials) using one firm-wide rate based on direct-labour hours.

(b). Compute the manufacturing cost of each product (excluding direct materials) using direct-labour 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-labour hours in assembly and machine hours in machining.

(d). Compare and explain the results in requirements 4a, 4b and 4c.

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Total cost (except direct materials) Machine hours Direct-labour hours Machining €585,000 97,500 15,000 Assembly Total €495,000 €1,080,000 105,000 45,000 30,000