Please show your work. plant handling and quality inspection. The costs expected
ID: 2423270 • Letter: P
Question
Please show your work.
plant handling and quality inspection. The costs expected for these categories for the coming year are as follows Material handling 200,000 Quality inspection 600,000 The plant currently applies overhead using machine hours and expected actual capacity. This figure is 80,000 machine hours. Linda Bixby, the plant manager, has been asked to submit a bid and has assembled the following data on the proposed job Potential Job Direct materials 3,700 Direct labour (1,000 hours) 7,000 Overhead Number of material moves 10 Number of inspections Machine hours 900 Linda has been told that many competitors use an activity-based approach to assign overhead to jobs. Before submitting her bid, she wants to assess the effects of this alternative approach. She estimates that the expected number of material moves for all jobs during the year is 1,000; she also expects 5,000 quality inspections to be performed Required. l. Compute the total cost of the potential job using machine hours to assign overhead. Assuming that the bid price is full manufacturing cost plus 25 percent, what would Linda's bid be? 2. Compute the total cost of the job using the number of material moves to allocate material handling costs and the number of inspections to allocate the quality inspection costs. Assuming a bid price of full manufacturing cost plus 25 percent, what is Linda's bid using this approach? 3. Which approach do you think best reflects the actual cost of the job? Explain.Explanation / Answer
1. COMPUTATION OF TOTAL COST OF THE POTENTIAL JOB UING MACHINE HOURS TO ASIGN OVERHEAD
DIRECT MATERIAL : $3700
DIRECTLABOUR : $7000
OVERHEAD
MATERIAL HANDLING O/H (200000/80000 *900) : $2250
QUALITY INPECTION O/H (600000/80000*900): $6750
TOTAL COST : $19700
LINDA'S BID
TOTAL COST : $19700
ADD: PROFIT (25% OF COST i.e 19700 : $4925
LINDA'S BIDDING PRICE : $24625
2. 1. COMPUTATION OF TOTAL COST OF THE POTENTIAL JOB UING ACTIVITY BASED APPROACH TO ASIGN OVERHEAD
DIRECT MATERIAL : $3700
DIRECTLABOUR : $7000
OVERHEAD
MATERIAL HANDLING O/H (200000/1000*10) : $2000
QUALITY INPECTION O/H (600000/5000*5): $600
TOTAL COST : $13300
LINDA'S BID
TOTAL COST : $13300
ADD: PROFIT (25% OF COST i.e 19700 : $3325
LINDA'S BIDDING PRICE : $16625
3. BEST REFLCTION OF THE ACTUAL COST
The cost as per ABC (activity based) allocation i.e $13300 reflects the actual price of the job as under this approach oherhead is allocated on the basis of activity involved instead of a single recovery rate.
in other words
1. if the product is consuming high volume of an activity then it is absorbing higher amount of overhead of that activity
2. Similarly if the product doe not consume any activity then that product hould not consume any part of the overhead of that activity
In the given problem the overheads of material handling and quality inspection are allocated a per their consumption of the overheads ($2000 and $600) instead of an uniform single rate . This allocation leads to a saving of $ 6400 (19700 -13300) making the bid more realistic and acceptable.
It also reflects a more transparent and real picure of the cost allocation.