Question

In: Accounting

Mattawa Manufacturing Inc. has four categories of overhead. The expected overhead costs for each of the...

Mattawa Manufacturing Inc. has four categories of overhead. The expected overhead costs for each of the categories for the next year are as follows:

Expected Costs Cost Driver

Activity Maintenance $510,000

Machine hours 60,000

Material handling 250,000

Material moves 20,000

Setups 60,000

Setups 3,000

Inspection 21,000

Inspections 12,000

Currently, the company applies overhead using a predetermined overhead rate based upon budgeted direct labour hours of 100,000. The company has been asked to submit a bid on a proposed job. Usually bids are based upon full manufacturing costs plus a percentage of 10 percent. Estimates for the proposed job are as follows:

Direct materials $30,000

Direct labour $24,000

Number of direct labour hours 8,000

Number of material moves 100

Number of inspections 120

Number of setups 24

Number of machine hours 4,000

Required:

1. If the company used activity-based cost drivers to assign overhead, calculate the bid price of the proposed job.

2. If the company used direct labour hours as the cost driver, calculate the bid price of the proposed job.

Expert Solution

Answer 1.

ABC Costing

Calculation of Activity Rate
Activity	Overhead	Cost Driver Quantity		Allocation Rate
Activity Maintenance	510,000	60,000	mach. hours	8.50	per mach. hour
Material Handling	250,000	20,000	material moves	12.50	per material move
Setups	60,000	3,000	setups	20.00	per setup
Inspections	21,000	12,000	inspections	1.75	per inspecton

Total	841,000


Assigning Overhead Cost
Using ABC Method
	Activity Based Overhead Rate		Proposed Bid
			Cost Driver Incurred		OH Allocated

Activity Maintenance	8.50	per mach. hour	4,000	mach. hours	34,000
Material Handling	12.50	per material move	100	material moves	1,250
Setups	20.00	per setup	24	setups	480
Inspections	1.75	per inspecton	120	inspections	210

Total Overhead Cost					35,940


Calculation of Bid Price
Under ABC Costing
Direct Material	30,000
Direct Labor	24,000
Overhead Applied	35,940
Total Cost	89,940
Add: Profit Margin - 10%	8,994
Bid Price	98,934


Answer 2.

Predetermined Overhead Rate = $841,000 (Total Overhead) / 100,000 DLH (Allocation Base)
Predetermined Overhead Rate = $8.41 per dlh

Calculation of Bid Price
Using Direct Labor Hour as Cost Driver
Direct Material	30,000
Direct Labor	24,000
Overhead Applied - 8,000 DLH X $8.41	67,280
Total Cost	121,280
Add: Profit Margin - 10%	12,128
Bid Price	133,408

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