Problem: Spear Custom Furniture uses an activity-based cost accounting system to apply overhead to production.
The company maintains four overhead cost pools. The four cost pools, and their budgeted amounts for the upcoming period, are as follows:
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
Materials handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Set-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Four cost drivers are used by Spear to allocate its overhead cost pools to production. The four cost
drivers, and their budgeted total levels of activity for the upcoming period, are shown below:
Machine hours (to allocate maintenance costs) . . . . . . . . . . . . . . . . . . . . . . .600 hours
Material moves (to allocate materials handling costs) . . . . . . . . . . . . . . . . . . 400 moves
Set-ups (to allocate set-up costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 set-ups
Number of inspections (to allocate quality control costs) . . . . . . . . . . . . . . . . 300 inspections
The company has been asked by Cosmopolitan University to submit a bid for tables to be used in a new computer lab. The plant manager feels that obtaining this job would result in new business in future years. Estimates for the Cosmopolitan University project are as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000
Direct labor (500 hours) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
Number of machine hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Number of material moves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Number of set-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Number of inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
a. Estimate the total cost of manufacturing the tables for Cosmopolitan University.
b. Determine the company's bid price if bids are based upon the total estimated manufacturing cost of a particular project, plus 75 percent.