Complete 12 pages APA formatted article: The Process of Cylinder Manufacturing Company’s Work. The new management is now thinking of changing the basis of absorption to a machine hour basis since machines do constitute a large extent of the manufacturing costs. Thus, it would be in the fitness of things to absorb overheads on a more suitable machine hour basis, which would be a true representation of overheads recovery, rather than the present system of an outdated labor hour method, which is unscientific in this case, as it provides inflated and inaccurate results. The comparative impact on costs and resultant benefits by following the machine hour basis is being delved into this study. Also, the aspect of over-absorption or under-absorption of costs also needs to be a subject matter of focus.
Next, coming to the Activity-based costing (ABC), how this would change the analysis of the costs between the standard and specialist products needs to be analyzed. Finally, necessary guidance on the implementation of an ABC system needs to be addressed.
1. There is a clear excess of £57.62/hour, being the difference between the rates of labor hour rate of £149.82/hour and machine hour rate of £92.20. Thus, by following the machine hour rate, it is seen that the impact on product cost would be lesser.
2. Due to the absorption of high overhead into the cost of products, both mass-produced high volume products and specialty products cost higher, with increased overheads having to be borne by the ultimate customer. Moreover, it is also seen that the low volume high costs specialty products, as rightly pointed out by the Production Manager, need to be borne by the regular high volume units.
3. The induction of machine-hours would set things in the right perspective, especially against the milieu, increasing the use of machines over manpower. The hourly machine rate of £92.20 would also be reflective of machine overheads used for production.