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Cost Allocation Rate: Cost Driver for allocation Materials/Handling 0.20 per part no. of parts used Cutting/lathe work 1.40 per part no. of parts used Direct labor hrs 20.00 per hour direct labor hours
The above information was used for direct labor rate....(Assemebly and Inspection - will that be considered OH ?)
The above seems to be the correct solution- considering the budgeted amount, the direct labor allocation rate for Overhead is calculated for answer to Q.2. I have considered Assembling and inspection as part of overhead ....since the question in the budget for 2004 considers that as part of overhead.
ABC is preferable as it provides accurate costing and can help a great deal in decision making specially while quoting price for a product which is very competitive. Traditional method is easier to use as it based on a rate calculated based on past experience but it is not as accurate as the ABC.
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Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases