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:
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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.