Summer Manufacturing Has Four Categories of Overhead Currently, Overhead Is Applied Using a Predetermined Overhead Rate Based

question 187

Multiple Choice

Summer Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed as follows: $\begin{array} { l r } \text { Maintenance } & \$ 255,000 \\ \text { Materials handling } & 125,000 \\ \text { Setups } & 30,000 \\ \text { Inspection } & 105,000 \end{array}$
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 100,000 direct labor hours are budgeted for next year.

The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent.
Estimates for the proposed job are as follows:
$\begin{array} { l r } \text { Direct materials } & \$ 15,000 \\ \text { Direct labor (8,000 hours) } & \$ 12,000 \\ \text { Number of material moves } & 100 \\ \text { Number of inspections } & 120 \\ \text { Number of setups } & 24 \\ \text { Number of machine hours } & 4,000 \end{array}$
The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers. Expected activity for the four activity drivers that would be used are:
$\begin{array} { l r } \text { Machine hours } & 60,000 \\ \text { Material moves } & 20,000 \\ \text { Setups } & 3,000 \\ \text { Quality inspections } & 12,000 \end{array}$ What is the total cost of the proposed job if Summer Manufacturing uses direct labor hours as its only activity driver?

• A)$72,000
• B)$68,200
• C)$56,200
• D)$53,200

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Definitions:

Futures Price

The set price at which an asset will be bought or sold in the future as per the terms of a futures contract.

Arbitrage Profits

Profits earned with no risk by simultaneously buying and selling the same asset in different markets to exploit price discrepancies.

Spot Gold

The current market price at which gold can be bought or sold for immediate delivery.

Risk-free Rate

The hypothetical yield of a risk-free investment, commonly signified by the interest rate on government bonds.