Labour Hours - Machine Hours

1) As we can see, on the calculations; the company has chosen labour hours for the allocation base. But when we do the calculations with the machine hours with the allocation base, we face with a huge difference and moreover see a lower total cost, which make high the profit. Making profit higher will be a good thing, so the company should choose the machine hours for their allocation base and calculations. In addition; because of the technology improvement and automation; machinery will be more usable and effective. Moreover, because the machines will be heterogenous, we will then need different number of labor for each. Some of them is highly-automated whereas some of them is low-automated. So, again we understand that machine hours will be a better allocation base then labour hours.

Labour hours Machine hours

Standard products (high volume) 2500 3500

Specialised products (low volume) 1500 3000

Total 4000 6500

Difference

Budgeted labour rate 42,5 279500/6500=43 -0,5

Budgeted overhead burden 149,825 599300/6500=92,2 57,625

Total Cost 192,325 135,2 57,125

2) As known, the most commonly used allocation base in traditional costing is direct labor hours. We can also see this in the case. But at this point, we may face with some problems such that in this process overhead is increasing while direct labor is decreasing. There is an 1800$ increase whereas 46% increase in the overheads dramatically. Moreover, we see a variance and complexity in the production process. Tankmaster Manufacturing Company is producing to