Conceptual Exercise:
The Jewell plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:
Maintenance $360,000
Inspection $750,000
The plant currently applies overhead using direct labor hours and expected capacity of 100,000 direct labor hours. The following data has been assembled for use in developing a bid for a proposed job. Bid prices are calculated as full manufacturing cost plus a 20 percent markup.
• Direct materials $2,100
• Direct labor $5,625
• Machine hours 450
• Number of inspections 4
• Direct labor hours 550
Total expected machine hours for all jobs during the year is 60,000, and the total expected number of inspections is 4,000
Required to do:
Problem 1: Compute the total cost of the potential job using direct labor hours to assign overhead. Determine the bid price for the potential job.
Problem 2: Compute the total cost of the job using activity-based costing and the appropriate activity drivers. Determine the bid price if activity-based costing is used.
Prepare a memorandum to the plant manager recommending a bid price for the potential job. Support your recommendation by explaining which costing method best reflects the actual cost of the job.