Winter Manufacturing has four categories of overhead: Maintenance £275,000; Mate

Question

Winter Manufacturing has four categories of overhead: Maintenance £275,000; Materials handling 125,000; Setups 30,000 and Inspection 105,000. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials £15,000; Direct labour (8,000 hours) £12,000; Number of material moves 100; Number of inspections 120; Number of setups 24; Number of machine hours 4,000. The plant manager has heard of a new way of applying overhead that uses cost pools and activity cost drivers. Expected activity for the four activity drivers that would be used are: Machine hours 60,000; Material moves 20,000; Setups 3,000; Quality inspections 26,750 and Direct labor hours 50,000. If Winter Manufacturing uses Quality inspections as its only activity driver, the total cost of the proposed job is
Winter Manufacturing has four categories of overhead: Maintenance £275,000; Materials handling 125,000; Setups 30,000 and Inspection 105,000. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials £15,000; Direct labour (8,000 hours) £12,000; Number of material moves 100; Number of inspections 120; Number of setups 24; Number of machine hours 4,000. The plant manager has heard of a new way of applying overhead that uses cost pools and activity cost drivers. Expected activity for the four activity drivers that would be used are: Machine hours 60,000; Material moves 20,000; Setups 3,000; Quality inspections 26,750 and Direct labor hours 50,000. If Winter Manufacturing uses Quality inspections as its only activity driver, the total cost of the proposed job is
Winter Manufacturing has four categories of overhead: Maintenance £275,000; Materials handling 125,000; Setups 30,000 and Inspection 105,000. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials £15,000; Direct labour (8,000 hours) £12,000; Number of material moves 100; Number of inspections 120; Number of setups 24; Number of machine hours 4,000. The plant manager has heard of a new way of applying overhead that uses cost pools and activity cost drivers. Expected activity for the four activity drivers that would be used are: Machine hours 60,000; Material moves 20,000; Setups 3,000; Quality inspections 26,750 and Direct labor hours 50,000. If Winter Manufacturing uses Quality inspections as its only activity driver, the total cost of the proposed job is

Explanation / Answer

Total cost of the proposed job under two situations:

Total cost if ABC method is used:

Total bid for the job:

OH allocated:

If winter manufacturing used quality insepctions as its only activity driver:

OH recovery rate= total OH cost/ activity driver= 535000/26750= 20 per insprection

OH allcoated to job= activity driver used* OH recovery rate= 120*20= 2400

Bid:

Workings:

Total OH calculation:

Particulars Amount Direct material 15,000.00 Direct labor 12,000.00 OH allocated 19,669.36 Total cost 46,669.36 Markup 4,666.94 BID 51,336.30

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