Final answer:
The plantwide allocation method can utilize direct labor hours, machine hours, direct materials cost, or the number of units produced. The lowest total cost determines the most efficient production technology, which can vary with changes in labor and capital costs.
Step-by-step explanation:
The plantwide allocation method commonly uses various bases for allocating overhead costs to products. The specific allocation basis chosen can vary, but common ones includeb, direct materials cost, or the number of units produced. The choice of allocation base depends on the relationship between the cost incurred and the allocation base. In scenarios where the choice of production technology affects costs, a firm should opt for the option with the lowest total cost, which may shift depending on the relative costs of labor and capital.
For example, if hiring labor costs $100 per unit of labor and capital costs $400 per unit, and the available methods are as follows:
- Method 1: 50 units of labor, 10 units of capital
- Method 2: 20 units of labor, 40 units of capital
- Method 3: 10 units of labor, 70 units of capital
The lowest cost method can be calculated by considering the cost of labor and capital for each method. If the cost of labor were to increase to $200/unit, a shift towards a method with less labor usage would become more economically favorable.