Lacy Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is as follows:
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Purchasing
|
$30,000
|
Engineering
|
$20,000
|
|
Setups
|
15,000
|
Other
|
25,000
|
Previously, Jennifer Langston, Lacy Company's controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 10,000. Jennifer has been reading about activity-based costing, and she wonders whether or not it might offer some advantages to her company. She decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 1,000 setups, and 500 engineering hours.
Jennifer has been asked to prepare bids for two jobs with the following information:
|
|
Job 1
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Job 2
|
|
Direct materials
|
$4,500
|
$8,600
|
|
Direct labor
|
$1,000
|
$2,000
|
|
Number of purchase orders
|
15
|
20
|
|
Number of setups
|
2
|
3
|
|
Number of engineering hours
|
25
|
10
|
|
Number of machine hours
|
200
|
200
|
The typical bid price includes a 30 percent markup over full manufacturing cost.
Required
1. Calculate a plantwide rate for Lacy Company based on machine hours. What is the bid price of each job using this rate?
2. Calculate activity rates for the four overhead activities. What is the bid price of each job using these rates?
3. Which bids are more accurate? Why?