Determine the amount of indirect manufacturing costs

Question

In the past, the Big Dog Carworks Ltd. (BDCL) allocated indirect manufacturing costs based on direct labour hours. Recently, management has decided to pilot a system of time-driven activity-based costing to allocate these costs. The division produces two small engine models: Basic and Heavy Duty. The following information has been obtained from the company s records over the past year:

Basic	Heavy Duty
Units produced	500,000	50,000
Direct material cost per engine	$40	$60
Direct labour cost per hour	$30	$30
Direct labour hours incurred	200,000	40,000
Inspections per engine	2	4
Inspection time per engine (hrs.)	.1	.3
Engines packed and shipped per batch	2,000	500
Individual engine packing time (hrs.)	.25	.4
Additional preparation time per batch (hrs.)	30	15

BDCL employs 245 employees to perform indirect labour functions, rotating among 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.

200 automated production machines are leased for $14,000,000 in total each year. Each machine is available for 1,600 hours per year, including set up time. Once a machine is set up, no labour is necessary to oversee it. Machine-related information for the year is as follows:

Basic	Heavy Duty
Machining hours per engine	.4	.6
Set up time per run (hrs.)	300	600
Number of production runs	100	50

Required

1. Determine the amount of indirect manufacturing costs allocated to one engine of each type (Basic, Heavy Duty) based on the existing cost allocation basis (direct labour hours).
2. Determine the total cost (direct material, direct labour, indirect manufacturing overhead) of producing one engine of each type using the existing cost allocation basis.
3. Determine the indirect manufacturing support costs for one engine of each type using time-driven activity-based costing.
4. Comment on the differences between results calculated in parts b and c.