Question

ABC Firm has decided to reevaluate its OH application base. It is currently using machine hours. The production manager believes that direct labour hours would be a better base, since it is easier to predict accurately. What factors should management consider in evaluating this decision? Be specific.

Answer 1

-- Direct labor hours (DLHs) is a better basis for calculation of Overhead rate, as it fully recognises the significance of the element of time in incurring and absorption of manufacturing overhead expenses.

-- DLHs base is admirably suited to operations which do not involve any large use of machinery.

The management should consider following factors

1) Structure of Organization - The base of DLHs are suited in the organization where production process is labor intensive. It means large labor force is required in production. It is not suited where operations involves large use of machinery.

2) Simple and easy to measure -- Overhead base should be simple and measurable. Direct labor hours can be measured by a timesheet and it is quite simple.