Question

Overhead Application, Activity-Based Costing, Bid Prices

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

Purchasing	$35,000
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.

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?

2. Calculate activity rates for the four overhead activities

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

Answer 1

Required 1 :
Total estimated overhead = 35000 + 40000 + 45000 + 40000	160000
Plantwide rate = Total estimated overhead / Total estimated machine hours = 160000 / 50000	3.2	per machine hour
	Job 1	Job 2
Direct materials	4500	9380
Direct labor	1200	2100
Overhead applied	640 [ 3.2 * 200 ]	640 [ 3.2 * 200 ]
Full manufacturing cost	6340	12120
(+) Markup @ 40%	2536	4848
Bid price	8876	16968

Required 2 :
	Activity rates
Purchasing ( 35000 / 5000 )	7	per purchase order
Setups ( 40000 / 500 )	80	per setup
Engineering ( 45000 / 2500 )	18	per engineering hour
Other ( 40000 / 50000 )	0.8	per machine hour

	Job 1		Job 2
Direct materials		4500		9380
Direct labor		1200		2100
Overhead applied :
Purchasing	105 [ 7 * 15 ]		140 [ 7 * 20 ]
Setups	240 [ 80 * 3 ]		320 [ 80 * 4 ]
Engineering	810 [ 18 * 45 ]		180 [ 18 * 10 ]
Other	160 [ 0.8 * 200 ]	1315	160 [ 0.8 * 200 ]	800
Full manufacturing cost		7015		12280
(+) Markup @ 40%		2806		4912
Bid price		9821		17192