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

question 19

Essay

Parkes Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: $\begin{array}{lr}\text { Maintenance } & £ 300,000 \\\text { Materials handling } & 150,000 \\\text { Setups } & 200,000 \\\text { Inspection } & 250,000\end{array}$ Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted.
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 25 per cent.
Estimates for the proposed job are as follows: $\begin{array}{lr}\text { Direct materials } & £ 20,000 \\\text { Direct labour (1,500 hours) } & £ 15,000 \\\text { Number of materials moves } & 20 \\\text { Number of inspections } & 25 \\\text { Number of setups } & 5 \\\text { Number of machine hours } & 750\end{array}$ In the past, full manufacturing cost has been calculated by allocating overhead using a traditional volume-based cost driver system--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows: $\begin{array}{lr}\text { Machine hours } & 40,000 \\\text { Material moves } & 8,000 \\\text { Setups } & 10,000 \\\text { Quality inspections } & 15,625\end{array}$
a.Determine the amount of overhead that would be allocated to the proposed job if direct labour hours are used as the cost driver.Determine the total cost of the proposed job.Determine the company's bid if the bid is based upon full manufacturing cost plus 25 per cent.
b.Determine the amount of overhead that would be applied to the proposed project if activity-based costing is used.Determine the total cost of the proposed job if activity-based costing is used.Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 25 per cent.
c.Which product costing method produces the more competitive bid?

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