The more competitive bid, Managerial Accounting

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 

(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.

Posted Date: 3/16/2013 6:06:36 AM | Location : United States

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