Situation 1: Labor cost classification (10 Points)

ABC Manufacturing Company has recently opened a plant in Bermuda in order to take advantage of certain tax benefits. In order to quality for these tax benefits, the company’s direct manufacturing labor costs must be at least 20% of total manufacturing costs for the period.

ABC Manufacturing normally classifies direct manufacturing wages as direct manufacturing labor, but classifies fringe benefits, overtime premiums, idle time, and vacation time and sick leave as indirect manufacturing labor (part of manufacturing overheads).

During the first period of operations in Bermuda, ABC incurs a total of $2,500,000 in manufacturing costs. Of that, $410,000 is direct manufacturing labor wages, $45,000 is overtime premium, $86,000 is fringe benefits, $20,500 is vacation time and sick leave, and $10,900 is idle time.


  1. Based on ABC Manufacturing Company’s normal cost classification practices, is the company likely to quality for the for the tax benefit? Show you calculations. (2 Points)
  2. Bob Ryan, the manager of the new Bermuda plant, is concerned that he will not get a bonus this year because the plant will not get the tax benefit. Describe TWO specific adjustments to ABC Manufacturing normal cost classification practices that Bod Ryan might ask the plant controller to make to ensure that ABC gets the tax benefit? (Be very specific in your response). Provide a specific rationale that Bod Ryan might use to justify each of the adjustments you described above.  (4 Point)
  3. Indicate whether the plant controller should make EACH of the TWO adjustments you described in part 2 above. Support your opinion with appropriate and logical arguments. (4 Points)

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