The more competitive bid, Managerial Accounting

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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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