Allen Inc. is a manufacturer of quality shoes. The company has always used a plant-wide allocation rate for allocating manufacturing overhead to its products. The plant manager believes it is time to change to a better method of cost allocation. The accounting department has established the following relationships between production activities and manufacturing overhead costs:

The previous plant-wide allocation rate method was based on direct manufacturing labour hours, and if that method is used, the allocation rate is $800 per labour hour.
Instructions
(a) Assume that a batch of 1,000 pairs of shoes requires 4,000 parts, 50 direct manufacturing labour hours, and 60 minutes of inspection time. What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs of shoes, assuming the previous plant-wide allocation rate method is used?
(b) What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs of shoes, assuming the activity-based method of allocation is used?
(c) Comment on the results.

Transcribed Image Text:

Cost Drivers Number of parts Labour hours Time spent by item at inspection station Allocation Rate Activities Material handling Assembly Inspection $ 8 per part 80 per hour 12 per minute