Problem

Spear Custom Furniture uses an activity-based cost accounting system to apply overhead to...

Spear Custom Furniture uses an activity-based cost accounting system to apply overhead to pro­duction. The company maintains four overhead cost pools. The four cost pools, and their budgeted amounts for the upcoming period, are as follows:

Maintenance   

  $40,000

Materials handling  

   20,000

Set-ups  

  10,000

Quality control  

  45,000

Four cost drivers are used by Spear to allocate its overhead cost pools to production. The four cost drivers, and their budgeted total levels of activity for the upcoming period, are shown below:

Machine hours (to allocate maintenance costs)  

  600 hours

Material moves (to allocate materials handling costs)

  400 moves

Set-ups (to allocate set-up costs)  

  100 set-ups

Number of inspections (to allocate quality control costs)

  300 inspections

The company has been asked by Cosmopolitan University to submit a bid for tables to be used in a new computer lab. The plant manager feels that obtaining this job would result in new business in future years. Estimates for the Cosmopolitan University project are as follows:

Direct materials       

  $14,000

Direct labor (500 hours) 

  $15,000

Number of machine hours

60

Number of material moves

20

Number of set-ups

4

Number of inspections  

2

a. Estimate the total cost of manufacturing the tables for Cosmopolitan University.


b. Determine the company’s bid price if bids are based upon the total estimated manufacturing cost of a particular project, plus 75 percent.

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