The president of Tiger Furnishings is confused about the differences in costs that result from using direct labor costs and machine-hours. Tiger furnishings produces two models of cabinets for home theater componets, the Basic and the Dominator. Data on the operations and costs for March follow:
Basic Dominator Total
Units produced 1,000 250 1,250
Machine-hours 4,000 2,000 6,000
Direct-labor hours 3,000 2,000 5,000
Direct materials costs $10,000 $3,750 $13,750
Direct labor costs 64,500 35,500 100,000
Manufacturing overhead costs 174,100
Total costs $287,850
a. Explain why the two product cost are different.
b. How would you respond to the president when asked to recommend one allocation base or the other?
c. The president says to choose the allocation base that results in the highest income. Is this an apporiate basis for choosing an allocation base?