Question

Ross manufacturing produces machine parts on a job order basis. Ross gets orders after winning bidding. The bidding price is based on full cost with a 20% markup. This company has two service departments, A and B, and two production departments, C and D. The following table provides departmental information.

	Service	Departments	Production	Departments
	A	B	C	D
Direct Costs	$100,000 (total operating)	$200,000 (total operating)	$200,000 (overhead)	$150,000 (overhead)
Number of Employees	8	9	35	45
Maintenance Hours	2000	200	6400	2600
Machine Hours			10,000	1,000
Labor Hours			1,000	10,000

Department A uses number of employees and DepartmentB uses maintenance hours to allocate direct costs. Overhead costs of Department C and D are allocated to products based on machine hours and labor hours respectively.

Ross is preparing a bid for a job 601 that requires 4 machine hours per unit produced in Department C and no labor time in Department D. The expected prime costs per unit for Job 601 is $70.

1. Allocate the service department costs to production departments using the direct method.

2. Determine the bidding price for Job 601.

Answer 1

• All working forms part of the answer
• Requirement 1

--Allocation

Department	Supplying (Service Department)		Production Department
	Department A	Department B	Department C	Department D
Direct Cost	$          100,000.00	$        200,000.00	$        200,000.00	$        150,000.00
Allocation of :
Department A	$       (100,000.00)		$           43,750.00	$          56,250.00
Department B		$      (200,000.00)	$        142,222.22	$          57,777.78
Total Cost after allocation	$                           -	$                          -	$        385,972.22	$        264,027.78

--Working for above

Department	Supplying (Service Department)		Production Department
	Department A	Department B	Department C	Department D
Direct Cost	100000	200000	200000	150000
Allocation of :
Department A			=100000*35/(35+45)	=100000*45/(35+45)
Department B			=200000*6400/(6400+2600)	=200000*2600/(6400+2600)

• Requirement 2

--Working

	Department C	Department D
Total Cost after allocation	$          385,972.00	$        264,028.00
Allocation base	Machine hours	Labor Hours
No. of hours	10000	10000
Overhead rate	$                    38.60	$                   26.40

--Answer

	Job 601
Prime Cost	$                    70.00
Overhead cost:
Department C [4 machine hours x $ 38.60]	$                  154.40
Department D [o hours]	$                           -
Total Cost	$                  224.40
20% Mark up	$                    44.88
Bidding Price	$                  269.28 [Answer can also be $ 269.27 because of rounding off differences]