Demo_SOl Chapter 6

Demo_SOl Chapter 6 - Demo Chapter 6 Solution a Traditional...

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Demo Chapter 6 Solution a. Traditional Costing: Total direct labor hours (DLH) of 800,000 (500,000 + 300,000) is the most appropriate cost driver (allocation base). The allocation rate is: Materials Handling Cost ÷ Cost Driver = Allocation Rate $1,088,000 ÷ 800,000 DLH = $1.36/DLH Allocated Materials Handling Cost 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 b. Traditional Costing with Automation: Total direct labor hours (DLH) drops to 340,000 (40,000 + 300,000). The allocation rate is: Materials Handling Cost ÷ Cost Driver = Allocation Rate $1,088,000 ÷ 340,000 DLH = $3.20/DLH Allocated Materials Handling Cost Product Allocation Rate x No. of DL Hours = Allocated Cost Desks $3.20/DLH x 40,000 = $ 128,000 Chairs $3.20/DLH x 300,000 = 960,000 Total $1,088,000 The allocations computed in requirement b, compared to those determined in requirement a, shift $552,000 of materials handling cost from desks to chairs , even though desks still require more materials handling than chairs. Thus automating desk production without changing the allocation base produces a
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