Question

XYZ Company has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:

Maintenance $420,000

Inspection $600,000

The plant currently applies overhead using direct labor hours and expected capacity of 100,000 direct labor hours. The following data has been assembled for use in developing a bid for a proposed job. Bid prices are equal to the full manufacturing cost plus a 30 percent markup.

Direct materials $3,500

Direct labor $6,500

Machine hours 400

Number of inspections 5

Direct labor hours 600

Total expected machine hours for all jobs during the year are 60,000, and the total expected number of inspections is 5,000.

Required:

1. Compute the total cost of the potential job using direct labor hours to assign overhead.

Determine the bid price for the potential job.

2. Compute the total cost of the job using activity-based costing and the appropriate activity drivers.

Determine the bid price if activity-based costing is used.

Answer 1

Solution a:

Predetermined overhead rate = Budgeted overhead / Budgeted labor hour = $1,020,000 / 100000 = $10.20 per hour

Bid price for job = Manufacturing cost * 130%

= ($3,500 + $6,500 + 600*$10.20) * 130%

= $20,956

Solution b:

Activity rate of maintenance = Budgeted maintenance cost / Budgeted machine hours = $420,000 / 60000 = $7 per machine hour

Activity rate of inspection = Budgeted inspection costs / Nos of inspections = $600,000 / 5000 = $120 per inspection

Overhead applied to proposed job = (400*$7) + (5*$120) = $3,400

Bid price for job = Manufacturing cost * 130%

= ($3,500 + $6,500 + $3,400) * 130%

= $17,420