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Conceptual Exercise
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The Jewell plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:
Maintenance $360,000
Inspection $750,000
The plant currently applies overhead using direct labor hours and expected capacity of 100,000 direct labor hours. The following data has been assembled for use in developing a bid for a proposed job. Bid prices are calculated as full manufacturing cost plus a 20 percent markup.
• Direct materials $2,100
• Direct labor $5,625
• Machine hours 450
• Number of inspections 4
• Direct labor hours 550
Total expected machine hours for all jobs during the year is 60,000, and the total expected number of inspections is 4,000
Required:
a. Compute the total cost of the potential job using direct labor hours to assign overhead. Determine the bid price for the potential job.
b. Compute the total cost of the job using activity-based costing and the appropriate activity drivers. Determine the bid price if activity-based costing is used.
Prepare a memorandum to the plant manager recommending a bid price for the potential job. Support your recommendation by explaining which costing method best reflects the actual cost of the job.
