Choosing an Appropriate Allocation Base in an Automated Environment: Birmingham Fabrication Corp. produces fence materials. One division manufactures fence rails and fence posts. As a general rule, more fence rails are produced than posts. For example, during the past week, 900 rails and 30 posts were manufactured.

Direct materials costs are $3.10 per rail and $3.00 per post. Direct labor of $200 was attributed to the rail manufacturing operation, and $250 was attributed to posts during the past week. Most of the direct labor costs are incurred in setting up the automated equipment. In the manufacturing process, it takes about the same amount of time for the equipment to produce one rail as it does to produce one post. This division has $550,000 in annual manufacturing overhead which is allocated based on direct labor costs. The annual direct labor costs are estimated at $44,000. The company produces 250,000 units per year.

a. Prepare a schedule to show the cost assigned to each rail and each post using direct labor as the basis for allocating overhead.

b. Prepare a schedule computing the unit costs of rails and posts using units of production as a basis for allocating overhead costs.

c. In light of the information provided, which method of overhead allocation ap- pears more reasonable? Why