King Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows:
|
Maintenance
|
$70,000
|
|
Materials handling
|
30,000
|
|
Setups
|
25,000
|
|
Inspection
|
50,000
|
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 50,000 direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually, bids are based upon full manufacturing cost plus 30 percent.
Estimates for the proposed job are as follows:
|
Direct materials
|
$2,500
|
|
Direct labor (750 hours)
|
$3,750
|
|
Number of machine hours
|
300
|
|
Number of material moves
|
8
|
|
Number of setups
|
3
|
|
Number of inspections
|
5
|
In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based driver e.g. direct labor hours. The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.
Expected activity for the four activity drivers that would be used are:
|
Machine hours
|
16,000
|
|
Material moves
|
4,000
|
|
Setups
|
2,000
|
|
Quality inspections
|
8,000
|
Required:
Determine the company's bid if direct labor hours are used as the volume-based driver and the bid is based upon full manufacturing cost plus 30 percent.
Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent.
Which product costing method produces the more competitive bid? And why?