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	40,000
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	$4,500	$9,380
Direct labor	$1,200	$2,100
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

Part 1
Calculation of Plantwide Overhead rate
Purchasing	$                                40,000
Setups	$                                40,000
Engineering	$                                45,000
Other	$                                40,000
Total manufacturing Costs	$                             1,65,000
Expected machine hours	50,000	hours
Plantwide Overhead rate($165,000/50,000)	$                                    3.30	per machine hour
Calculation of Bid Price
	Job 1	Job 2
Direct Material	$                                  4,500	$                                      9,380
Direct labor	$                                  1,200	$                                      2,100
Manufacturing Overhead @$3.30 per machine hours	$                                     660	$                                         660
Total Manufacturing Cost	$                                  6,360	$                                    12,140
Add:40% Markup on Manufacturing Cost	$                                  2,544	$                                      4,856
Total Bid Price	$                                  8,904	$                                    16,996
Part 2
Calculation of Activity Rate
Activity	Activity Cost	Cost Driver	Activity Rate
Purchasing	$                                40,000	5,000 purchase orders	$                                    8.00	per purchase orders
Setups	$                                40,000	500 setups	$                                  80.00	per Setups
Engineering	$                                45,000	2,500 Engineering hours	$                                  18.00	per Engineering hours
Other	$                                40,000	50,000 Machine hours	$                                    0.80	per Machine hours
Calculation of Bid Price
	Job 1	Job 2
Direct Material	$                                  4,500	$                                      9,380
Direct labor	$                                  1,200	$                                      2,100
Purchasing	$                                     120	$                                         160
Setups	$                                     240	$                                         320
Engineering	$                                     810	$                                         180
Other	$                                     160	$                                         160
Total Manufacturing Cost	$                                  7,030	$                                    12,300
Add:40% Markup on Manufacturing Cost	$                                  2,812	$                                      4,920
Total Bid Price	$                                  9,842	$                                    17,220
Bid Prices under Part 2 which is as per Activity Rates are more accurate