Question

Overhead Application, Activity-Based Costing, Bid Prices

Firenza Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is:

Purchasing	$40,000
Setups	37,500
Engineering	45,000
Other	40,000

Previously, Sanjay Bhatt, Firenza Company's controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 50,000. Sanjay has been reading about activity-based costing, and he wonders whether or not it might offer some advantages to his company. He decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 500 setups, and 2,500 engineering hours.

Sanjay has been asked to prepare bids for two jobs with the following information:

	Job 1	Job 2
Direct materials	$4,600	$9,380
Direct labor	$1,200	$2,200
Number of purchase orders	15	20
Number of setups	3	4
Number of engineering hours	45	10
Number of machine hours	200	200

The typical bid price includes a 40 percent markup over full manufacturing cost.

Required:

Note: When required, round your answers to the nearest cent.

1. Calculate a plantwide rate for Firenza Company based on machine hours.
$ per machine hour

What is the bid price of each job using this rate?

	Bid Price
Job 1	$
Job 2	$

2. Calculate activity rates for the four overhead activities.

Purchasing rate	$	per purchase order
Setup cost rate	$	per setup
Engineering rate	$	per engineering hour
Other cost rate	$	per machine hour

What is the bid price of each job using these rates?

	Bid Price
Job 1	$
Job 2	$

3. Which bids are more accurate?

Answer 1

Question 1

Plantwide Overhead Rate = Total Estimated Manufacturing Overhead / Total Machine Hours

Total Estimated Manufacturing Overhead = $ 162,500

Total Machine Hours = 50,000 Hours

Plantwide Overhead Rate = 162,500 / 50,000

Plantwide Overhead Rate = $ 3.25 per Machine Hour

Particulars	Job 1	Job 2
Direct Materials	4,600	9,380
Direct Labour	1,200	2,200
Overhead Costs	650	650
Full Manufacturing Costs	6,450	12,230
Markup (40% of Full Manufacturing Costs)	2,580	4,892
Bid Price	9,030	17,122

Notes

Full Manufacturing Costs = Direct Materials + Direct Labour + Overheads

Bid Price = Full Manufacturing Costs + Markup

Overhead Costs for Job 1 = 200 Machine Hours * 3.25 per Hour = $ 650

Overhead Costs for Job 2 = 200 Machine Hours * $ 3.25 per Machine Hour = $ 650

Question 2

	A	B	C = A/B
Particulars	Estimated Costs	Activity Level	Activity Allocation Rate
Purchasing	40,000	5,000	8	Per Purchase Order
Set-up	37,500	500	75	Per setup
Engineering	45,000	2,500	18	Per Engineering Hour
Other	40,000	50,000	0.80	Per Machine Hour
Total	162,500

Particulars	Job 1	Job 2
Direct Materials	4,600	9,380
Direct Labour	1,200	2,200
Purchasing	120	160
Setup Costs	225	300
Engineering	810	180
Others	160	160
Full Manufacturing Costs	7,115	12,380
Markup (40% of Full Manufacturing Costs)	2,846	4,952
Bid Price	9,961	17,332

Notes

For Job 1

Purchasing = 15 Orders * $ 8 per Order = $ 120

Setup = 3 Setups * $ 75 per Setup = $ 225

Engineering = 45 Hours * $ 18 per Hour = $ 810

Other = 200 Hours * $ 0.80 per Machine Hour = $ 160

For Job 2

Purchasing = 20 Orders * $ 8 per Order = $ 12/60

Setup = 4 Setups * $ 75 per Setup = $ 300

Engineering = 10 Hours * $ 18 per Hour = $ 180

Other = 200 Hours * $ 0.80 per Machine Hour = $ 160

Full Manufacturing Costs = Sumof all Costs

Question 3

Activity Based Costing provide more accurate bid price as it allocates Overhead on the basis of their consumption level rather than using a single cost driver for allocating Overhead Cost.