Questions:
Indianapolis Auto Parts (IAP) has a Seat Manufacturing Department that uses activity-based costing. IAP's system has the following activities:
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Activity
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Allocation Base
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Cost Allocation Rate
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Purchasing
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Number of purchase orders
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$50.00 per purchase order
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|
Assembling
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Number of parts
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$0.50 per part
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Packaging
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Number of finished seats
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$1.00 per finished seat
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Each auto seat has 20 parts. Direct materials cost per seat is $1. Direct labor cost per seat is $10. Suppose Ford has asked IAP for a bid on 50,000 built-in baby seats that would be installed as an option on some Ford SUVs. IAP will use a total of 200 purchase orders if Ford accepts IAP's bid.
Requirements
1. Compute the total cost IAP will incur to (a) purchase the needed materials and then (b) assemble and (c) package 50,000 baby seats. Also, compute the average cost per seat.
2. For bidding, IAP adds a 30% markup to total cost. What total price will IAP bid for the entire Ford order?
3. Suppose that instead of an ABC system, IAP has a traditional product costing system that allocates indirect costs other than direct materials and direct labor at the rate of $65 per direct labor hour. The baby-seat order will require 10,000 direct labor hours. What price will IAP bid using this system's total cost?
4. Use your answers to Requirements 2 and 3 to explain how ABC can help IAP make a better decision about the bid price to offer Ford.