Question

. Graham Company has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection $900,000 1,500,000 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. Additionally, the total expected machine hours for all jobs during the year are 100,000, and the total expected number of inspections is 12,000. Direct materials Direct labor Machine hours Number of inspections Direct labor hours $10,000 $13,000 800 900 Bid prices are equal to full manufacturing cost plus a 40 percent markup. Required: a. Compute the total cost of the potential job using direct labor hours to assign overhead. Determine the bid price for the potential job. b. 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

a. Compute the Total Cost of the potential Job using direct labor hours to assign overheads: Overheads Amount ($) Particulars S.No Maintenance $ 1 900,000 $ Inspection 1,500,000 2 $ 2,400,000 Total No. of Direct Labor Hours 100,000 Overhead Rate (Using Direct Labor Hours) $2,400,000/100,000 Hours Overhead Rate (Using Direct Labor Hours) $24 per Direct Labor Hour Total Cost of the Job: Amount ($) Particulars S.No $ Materials 10,000 1 $ Labor 2 13,000 Overheads 21,600 44,600 3 Total Cost Bid Price Bid Price is calculated as Total Manufacturing Cost + 40% Mark-up Therefore, Bid Price $ 44,600 ($ 44,600* 40/100) Bid Price $62,440

b. Compute the Total Cost of the potential Job using activity-based costing to assign overheads: Overheads Activity Rate 9.00 per Machine Hour 125.00 per Inspection Amount ($) 900,000 of Machine Hours $ Particulars S.No Activity Driver Maintenance $ 100,000 $ 12,000 $ 1 Inspection 1,500,000 #of Inspections 2 Total Cost of the Job Amount ($) $ $ Particulars S.No Materials 1 10,000 13,000 7,200 (800 Hours@$9 per Hour) 1,125(9 Inspections@ $ 125 per Inspection) 31,325 Labor 2 Maintenance $ $ Inspection Total Cost 4 Bid Price Bid Price is calculated as Total Manufacturing Cost + 40% Mark-up Therefore, Bid Price $31,325+ ($ 31,325* 40/100) Bid Price $ 43,8 55