4-B2 Allocation, Department Rates, and Direct-Labor Hours Versus Machine Hours The Hernandez Manufacturing Company has two producing departments, machining and assembly. Mr. Hernandez recently automated the machining department. The installation of a CAM system, together with robotic workstations, drastically reduced the amount of direct labor required. Meanwhile, the assembly department remained labor intensive. The company had always used one firm-wide rate based on direct-labor hours as the cost-allocation base for applying all costs (except direct materials) to the final products. Mr. Hernandez was considering two alternatives: (1) continue using direct-labor hours as the only cost-allocation base, but use different rates in machining and assembly, and (2) using machine hours as the cost-allocation base in the machining department while continuing with direct- labor hours in assembly. Budgeted data for 20X0 are as follows: Machining Total Total cost (except direct materials) Machine hours Direct-labor hours *Not applicable. Assembly $540,000 90,000 $494,000 $1,034,000 90,000 12,000 38,000 50,000 1. Suppose Hernandez continued to use one firm-wide rate based on direct-labor hours to apply all manufacturing costs (except direct materials) to the final products. Compute the cost-application rate that would be used. 2. Suppose Hernandez continued to use direct-labor hours as the only cost-allocation base but used different rates in machining and assembly. a. Compute the cost-application rate for machining. b. Compute the cost-application rate for assembly. 3. Suppose Hernandez changed the cost accounting system to use machine hours as the cost-allocation base in machining and direct-labor hours in assembly. a. Compute the cost-application rate for machining. b. Compute the cost-application rate for assembly. 4. Three products use the following machine hours and direct-labor hours: Machine Hours in Machining Product A 10.0 Product B 18.0 Product C 11.0 Direct-Labor Hours in Machining 2.5 3.0 2.7 Direct-Labor Hours in Assembly 13.0 3.3 8.5 a. Compute the manufacturing cost of each product (excluding direct materials) using one firm-wide rate based on direct-labor hours. b. Compute the manufacturing cost of each product (excluding direct materials) using direct- labor hours as the cost-allocation base, but with different cost-allocation rates in machining and assembly. c. Compute the manufacturing cost of each product (excluding direct materials) using a cost- allocation rate based on direct-labor hours in assembly and machine hours in machining. d. Compare and explain the results in requirements 4a, 4b, and 4c