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

question 151

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 amount of overhead allocated to the proposed job if Summer Manufacturing uses direct labor hours as its only activity driver?

• A)$20,800
• B)$30,400
• C)$30,000
• D)$41,200

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Definitions:

Assets

Resources owned or controlled by a business that are expected to produce economic value or benefits in the future.

Accounting Equation

A fundamental principle representing the relationship between an entity's assets, liabilities, and equity; Assets = Liabilities + Equity.

Creditor

An entity or person that lends money or extends credit to another party, expecting to be repaid in the future.

Liability

A financial obligation or debt owed by a company to another entity, payable in the form of money, services, or goods, recorded on the right-hand side of the balance sheet.