Bailey Corporation has four categories of overhead. The expected overhead costs
ID: 2449899 • Letter: B
Question
Bailey Corporation has four categories of overhead. The expected overhead costs for each category for next year are as follows:
Maintenance
$420,000
Materials handling
180,000
Setups
150,000
Inspection
300,000
Total: $1,050,000
Expected activity for the four activity-based cost drivers that would be used is:
Machine-hours
20,000
Material moves
4,000
Setups
200
Quality inspections
8,000
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
Required:
1. Determine the amount of overhead that would be allocated to the proposed job if the Traditional Approach is used and 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. (Round amounts to 2 decimal places.)
2. Determine the amount of overhead that would be applied to the proposed project if activity-based costing (ABC) 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. (Round amounts to 2 decimal places.)
3. Which product costing method produces the more competitive bid?
A) 70
Maintenance
$420,000
Materials handling
180,000
Setups
150,000
Inspection
300,000
Explanation / Answer
Solution :
1. Total cost for proposed job (Traditional approach)
Direct material
10,000.00
Direct labor
15,000.00
Manufacturing overhead (750 x 26.25*)
19,687.50
Total
44,687.50
Add 30%
13,406.25
Bid amount
58,093.75
*calculation of overhead rate
Maintenance
420000
Materials handling
180,000
Setups
150,000
Inspection
300,000
Total
1050000
Direct labour hour
40,000
Overhead rate (1050000/40000)
26.25
2.total cost for proposed job (ABC)
Direct material
10,000.00
Direct labor
15,000.00
Materials handling(180000*8/4000)
360.00
Setups (150000*3/200)
2,250.00
Inspection =300000*5/8000
187.50
Maintenance =420000*300/20000
6,300.00
34,097.50
Add : 30%
10,229.25
Bid amount
44,326.75
3.activity based product costing method produces the more competitive bid as bid amount is lower as compared to traditional approach.
1. Total cost for proposed job (Traditional approach)
Direct material
10,000.00
Direct labor
15,000.00
Manufacturing overhead (750 x 26.25*)
19,687.50
Total
44,687.50
Add 30%
13,406.25
Bid amount
58,093.75
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