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

question 182

Multiple Choice

Lawson Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows: $\begin{array} { l r } \text { Maintenance } & \$ 180,000 \\ \text { Materials handling } & 27,000 \\ \text { Setups } & 24,000 \\ \text { Inspection } & 90,000 \end{array}$
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 20,000 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 15 percent. Estimates for the proposed job are as follows:
$\begin{array}{lr}\text { Direct materials } & \$ 3,000 \\\text { Direct labor (600 hours) } & \$ 9,000 \\\text { Number of material moves } & 4 \\\text { Number of inspections } & 6 \\\text { Number of setups } & 80\end{array}$
In the past, full manufacturing cost has been calculated by allocating overhead using a volumebased activity driver, directlabor hours. 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:
$\begin{array}{lr}\text { Machine hours } & 5,000 \\\text { Material moves } & 600 \\\text { Setups } & 200 \\\text { Quality inspections } & 1,000\end{array}$
If the number of inspections is used to assign inspection costs, the amount of inspection costs allocated to the proposed job would be

• A)$2,700.
• B)$ 990.
• C)$ 900.
• D)$ 540.

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Definitions:

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