Parkes Manufacturing Has Four Categories of Overhead

question 38

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:
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 percent.
Estimates for the proposed job are as follows:
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:
Required:

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 percent.
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 percent.
c.
Which product costing method produces the more competitive bid?

---

Definitions:

Exclusivity Pricing Strategy

A pricing method where high prices are set due to the unique or exclusive nature of a product, targeting a specific segment of the market.

Cost Plus Pricing

A pricing strategy where a fixed percentage or amount is added to the cost of producing a product to determine its sale price.

Parallel Market

An unofficial market where goods are traded outside of the official channels, often at a different price point.

Dumping Strategy

A practice where companies sell products in foreign markets at prices lower than those in their domestic market, often to increase market share or unload surplus inventory.