Demo 5

# Demo 5 - Demo Chapter 5 Alternative Allocation Options...

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Alternative Allocation Options Demo Chapter 5

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Martinez Furniture Company (MFC) makes desks and chairs. Desks require 5 hours of direct labor per unit and chairs require 2 hours per unit. Each month MFC normally uses 500,000 hours of direct labor making desks and 300,000 hours of direct labor making chairs in the course of starting and completing work on 100,000 desks and 150,000 chairs. The company incurs \$1,088,000 of materials handling cost each month. Required: a. Select the most appropriate allocation base (labor hours or units) and compute the amount of the materials handling cost that should be allocated to the desks and the amount that should be allocated to the chairs.
Martinez Furniture Company (MFC) makes desks and chairs. Desks require 5 hours of direct labor per unit and chairs require 2 hours per unit. Each month MFC normally uses 500,000 hours of direct labor making desks and 300,000 hours of direct labor making chairs in the course of starting and completing work on 100,000 desks and 150,000 chairs. The company incurs \$1,088,000 of materials handling cost each month. Required: a. Traditional Costing: Total direct labor hours (DLH) of 800,000 (500,000 + 300,000) is the most appropriate cost driver (allocation base). Allocated Materials Handling Cost Materials Handling Cost Cost Driver = Allocation Rate \$1,088,000 800,000 DLH = \$1.36/DLH Product Allocation Rate x No. of DL Hours = Allocated Cost Desks \$1.36/DLH x 500,000 = \$ 680,000 Chairs \$1.36/DLH x 300,000 = 408,000 Total \$1,088,000 The allocation rate is:

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Distortion in Desks? \$ (Overcosted / Undercosted) Distortion in Chairs? \$ (Overcosted / Undercosted) b. A technological development enables MFC to automate the process for making desks. By installing robots, MFC reduces the amount of direct labor required to make one desk to .4 hours. It now takes 40,000 direct labor hours to make 100,000 desks (.4 hours x 100,000). It still takes 300,000 direct labor hours to make 150,000 chairs (2 hours x 150,000). Assume the same amount (\$1,088,000) of materials handling cost. Allocate materials handling cost to desks and chairs using the reduced number of direct labor hours as the allocation base. Compare the amount of allocated cost computed in requirement a with that computed in requirement b . Identify the product that is overcosted and explain how the overcosting affects profitability. Identify the product that is undercosted and explain how the undercosting affects profitability. With automation, total direct labor hours (DLH) drops to 340,000 (40,000 + 300,000).
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## This note was uploaded on 02/22/2012 for the course BUAD 2050 taught by Professor Nicholasw.schroeder during the Spring '09 term at Toledo.

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Demo 5 - Demo Chapter 5 Alternative Allocation Options...

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