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Hornsby Manufacturing has four categories of overheads. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance $140,000 Materials handling 60,000 Set-ups 50,000 Inspection 100,000 Currently, overheads are applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The factory manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 30%. Estimates for the proposed job are as follows: Direct materials $5,000 Direct labour (750 hours) $7,500 Number of materials moves 8 Number of inspections 5 Number of set-ups 3 Number of machine hours 300 In the past, full manufacturing cost has been calculated by allocating overheads using a volume-based cost driver - direct labour hours. The factory manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours 16,000 Material moves 4,000 Set-ups 2,000 Quality inspections 8,000 Required: (A) (i) Verify the amount of overheads that would be allocated to the proposed job if direct labour hours are used as the volume-based cost driver. (ii) verifythe total cost of the proposed job. (iii)) verify the company's bid if the bid is based upon full manufacturing cost plus 30%. (B) (i) Verify the amount of overheads that would be applied to the proposed job if activity-based costing is used. (ii) Verify the total cost of the proposed job if activity-based costing is used. (iii) Verify the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30%. (C) Which product costing method produces the more competitive bid? Provide a logical explanation for the difference between the two bid prices.
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