The existing system does not account for time spent in the testing facility by each set of products. It allocates burden according to ‘direct labor dollar’ incurred instead of ‘machine hours’.
DIRECT LABORMAIN ROOMMECH ROOMTOTAL
Machine hour rate 80Current:
Burden rate per direct labour hour0.21.45
Main Test Room63.3
Mechanical Test Room 112.6
3.Which system is preferable and why?
The Consultants system is preferable as it takes into account the high cost of the Mechanical testing room and allocates that cost to the products that make use of that room instead of spreading it across all processes.
4.Would you treat the new machine as a separate cost center or as part of the main test room? I would treat it as a separate cost center because it is not used by all processes.