Production workers for Bianco Manufacturing Company provided 3,600 hours of labo

Question

Production workers for Bianco Manufacturing Company provided 3,600 hours of labor in January and 1,900 hours in February. The company, whose operation is labor intensive, expects to use 32,000 hours of labor during the year. Bianco paid a $96,000 annual premium on July 1 of the prior year for an insurance policy that covers the manufacturing facility for the following 12 months.


Explain why allocation is needed. Based on this information, how much of the insurance cost should be allocated to the products made in January and to those made in February?

Explanation / Answer

Since the insurance is an indirect cost and could not be trace directly for the cost, it should be allocated to better determine the costs of product manufactured. There are also 4 other reasons to the purpose of cost allocation : To provide information needed for decision making. To reduce the frivolous use of common resources. To encourage managers to evaluate the efficiency of internally provided services. To calculate the full cost of products for financial reporting purposes and for determining cost-based prices. The cost should be allocated based on the labor hours. $96,000 /32,000 hours = $3/hour Insurance costs to allocate: Jan $3 x 3600hrs = $10,800 Feb $3 x 1900hrs = $5,700

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