Reference no: EM132656885

Conventional vs. Activity-based Costing

The Pasifika Cement plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for 2008 are as follows:

Maintenance $ 60,000

Inspection 180,000

The plant currently applies overhead using direct labor hours and expected capacity of 20,000 direct labor hours is available. The data provided below has been assembled for use in developing a bid for a proposed job. Bid prices are calculated as full manufacturing cost plus 40 percent markup.

Direct materials $1,200

Direct labor $6,000

Machine hours 300

Number of inspections 3

Direct labor hours 400

Total expected machine hours for all jobs during the year were 10,000, and the total expected number of inspections is 1,500.

REQUIRED

Question 1. (i) Compute the pre-determined manufacturing overhead rate using the current conventional method (label the rate correctly).

(ii) Compute the total cost of the potential job using the MOH rate in 1 (i).

(iii) Determine the bid price for the potential job.

Question 2. (i) Compute the pre-determined manufacturing overhead rates using activity-based costing (ABC) and assuming maintenance is applied to jobs using machine hours, while inspection is applied to jobs using number of inspections (label the rates correctly).

(ii) Compute the total cost of the job using the rates in (2) (i)

(iii) Determine the bid price for the potential job assuming ABC is used.

Question 3. memorandum to the plant manager recommending a bid price for the potential job. Support your recommendation by explaining which method best reflects the actual cost of the job.