Kelley Corporation has four categories of overhead. The expected overhead costs for each category for next year are as follows:
Maintenance ..........$280,000
Materials handling ........$120,000
Setups..............$100,000
Inspection ...........$200,000
The company has been asked to submit a bid for a proposed job. The plant manager believes that obtaining this job would result in new business in future years. Bids are usually based upon full manufacturing cost plus 30 percent. Estimates for the proposed job are as follows:
Direct materials ..........$10,000
Direct labor (750 hours).....$15,000
Number of material moves.......$8
Number of inspections........$5
Number of setups.........$3
Number of machine-hours........$300
Expected activity for the four activity-based cost drivers that would be used are:
Machine-hours .....$20,000
Material moves ......$4,000
Setups........$200
Quality inspections ...$8,000
Required:
a. Determine the amount of overhead that would be allocated to the proposed job if 40,000 direct labor-hours are used as the volume-based cost driver. Determine the total costs of the proposed job. Determine the company's bid if the bid is based upon full manufacturing cost plus 30 percent.
b. Determine the amount of overhead that would be applied to the proposed project if activity-based costing is used. Determine the total costs of the proposed job if activity-based costing is used. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent.
c. Which product costing method produces the more competitive bid? Why?