Determine the total cost and product costing method, Cost Accounting

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Question

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) Determine 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) Determine the total cost of the proposed job.

(iii)) Determine the company's bid if the bid is based upon full manufacturing cost plus 30%.

(B) (i) Determine the amount of overheads that would be applied to the proposed job if activity-based costing is used.

(ii) Determine the total cost of the proposed job if activity-based costing is used.

(iii) Determine 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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