Hans Sorensen, Controller of Franklin Production, Has the Choice of Allocating

question 139

Essay

Hans Sorensen, controller of Franklin Production, has the choice of allocating indirect manufacturing cost using either direct manufacturing labour hours or manufacturing machine hours.If he uses labour hours for the month of January, Product A receives $312,000 in manufacturing overhead charges and Product B receives $448,000.When machine hours are used Product A receives $352,000 in manufacturing overhead charges while Product B receives only $408,000.Required:You are the department manager in charge of Product A and are strongly in favour of using labour hours.Of course, your co-manager, who is in charge of Product B, is strongly in favour of machine hours.What are some arguments you may be able to give for the allocation base that favours your department's product?

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Definitions:

Industry Cost

The total expenses incurred by firms operating within a specific industry, including production, labor, and capital costs.

Demand Conditions

pertain to the nature and size of the market demand for products or services in a given industry, influencing competitive strategy and innovation.

Pure Monopolist

A single seller in a market with no close substitutes for the product, giving the seller significant control over prices.

Maximum Profit

The highest possible financial gain a business can achieve from its operations, given its costs and revenue structure.