Question

The job costing system at Shannon's Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs, Job 215, an order of 15 intricate personalized frames, and Job 325, an order of 5 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity-based job costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows. (Click the icon to view the cost and driver data.) (Click the icon to view the job data.) Read the requirements Requirement 1. Compute the total overhead allocated to each job under a simple costing system, where overhead is alocated based on machine-hours. Begin by calculating the overhead rate under the simple costing system. First select the formula, then enter the applicable amounts and calculate the rate. (Round your answer to the nearest cent. Abbreviations used: bgt. = budgeted, mach. = machine, mat - material, purch - purchase, aty. - quantity.) Budgeted overhead rate Simple costing system

Answer 1

Part 1

Overhead is allocated based on machine hours according to a simple job-costing system.

Total overhead costs	/	Machine hours	=	Budgeted overhead rate sinple costing system
$250200	/	10000	=	$25.02

Overhead allocation rate = total estimated overhead costs / total estimated machine hours = 250200/10000 = $25.02

	Job 215	Job 325
Overhead allocated	$750.60	$1751.40

Job 215 = 25.02*30 = $750.60

Job 325 = 25.02*70 = $1751.40

Part 2

	Budgeted Overhead (1)	Activity Driver (2)	Budgeted Activity Driver (3)	Activity Rate (4) = (1) ¸(3)
Purchasing	32300	Purchase orders processed	1900	$17
Material handling	46800	Material moves	5200	$9
Machine maintenance	150000	Machine hours	10000	$15
Product inspection	5600	Inspections	1400	$4
Packaging	15500	Units produced	3100	$5
	250200

	Job 215	Job 325
Overhead allocated
Purchasing (17*23); (17*8)	391	136
Material handling (9*18); (9*4)	162	36
Machine maintenance (15*30); (15*70)	450	1050
Product inspection (4*7); (4*5)	28	20
Packaging (5*15); (5*5)	75	25
	$1106	$1267

Part C

ABC information can be used for bidding for jobs more competitively as it provides managers with a more detailed and accurate reflection of the resources used for and the costs of each job. In the given case it five indirect cost pools are used systematically for allocating overhead costs. It provide more accurate product cost compared to traditional simple costing system which is based on single allocation base. With the help of ABC, it is possible for manager to reduce level of activity and cost of activity for cost management.