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    Indirect labour hour calculations

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    In the past, TTTH Inc. allocated indirect manufacturing costs based on direct labor hours. Recently, management has decided to pilot a system of time-driven activity-based costing (TDABC) to allocate these costs. The division produces three engine models: Basic, Sport, and Heavy Duty. Acme employs 300 employees to perform indirect labour functions, consisting of machine setups, engine inspections and shipping. Each employee is paid $50,000 per year on average, including benefits. On average, each employee works 1,600 hours per year. Each automated production machine is used 1,600 hours per year, including set up time. Once a machine is set up, no labour is necessary to oversee it.

    The following information has been obtained from the company's records over the past year:

    Basic Sport Heavy Duty
    Units produced 500,000 150,000 50,000
    Direct material cost per unit $40 $50 $60
    Direct labour cost per hour $30 $30 $30
    Direct labour hours incurred 200,000 225,000 40,000
    Inspections per engine 2 3 4
    Inspection time per engine (hrs.) .1 .2 .3
    Engines packed and shipped per batch 2,000 1,000 500
    Individual engine packing time (hrs.) .25 .3 .4
    Additional preparation time per batch (hrs.) 30 20 15
    Machine set-ups per year 240 180 60
    Labor hours for each machine set-up 30 40 60

    a. Determine the indirect labor support costs for each engine using time-driven activity-based costing.
    b. Determine the per cent of unused indirect labor compared to available indirect labor hours. Draw conclusions from this analysis.

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    Solution Preview

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    Updated in word doc as requested.

    Indirect labor employees 300
    Hours per year 1,600
    Number of hours in a year 480,000

    Cost per employee per year $50,000
    Total yearly costs of indirect labor $15,000,000

    Type of engines Basic Sport Heavy duty Basic Sport Heavy duty Total
    Workings Indirect labor hours
    Units produced 500,000 150,000 50,000
    Number of inspections per engine 2 3 4
    Inspection time per engine (hours) 0.10 0.20 0.30
    Total inspection time 100,000 ...

    Solution Summary

    The indirect labor hour calculations are provided for manufacturing costs.