Question

Han Solo, controller of Millennium Falcon Mfg., has the choice of allocating indirect manufacturing cost using either direct manufacturing labour hours or manufacturing machine hours. If he uses labour hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and Product B receives $448,000. When machine hours are used Product A receives $352,000 in manufacturing overhead charges while Product B receives only $408,000.

Required: You are the department manager in charge of Product A and are strongly in favour of using labour hours. Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours. What are some arguments you may be able to give for the allocation base that favours your department's product?

Answer 1

Product A favours using labour hours as a base. Thus an argument will be made trying to use labour hours as a base.

Labour Hours is most preferred to be used as an allocation base when:

The product is highly labour intensive in nature, and a lot of human interference is required.

In case of customized products, labour hours is preferred as the machine operators will have to invest their time and knowledge to alter the product as per the custom requirement.

In environments where machines are lesser used like weaving , knitting, mining, etc labour hours is a better allocation base.

No matter how automated the machinery and equipment is, there is always a use of labour for either , supervising or running the machines or inspection , etc.