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:
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
Required:
(A) (i) Verify 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) verifythe total cost of the proposed job.
(iii)) verify the company's bid if the bid is based upon full manufacturing cost plus 30%.
(B) (i) Verify the amount of overheads that would be applied to the proposed job if activity-based costing is used.
(ii) Verify the total cost of the proposed job if activity-based costing is used.
(iii) Verify 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.