Problem - Assume that Kent Manufacturing has two categories of overhead: material handling and quality inspection. The costs of expected for these categories for the coming year are as follows:
Material handling $100,000
Quality of inspection $300,00
Total number of material moves 500
Total number of inspections 200
The plant currently applies overhead using direct labor hours and expected actual capacity. This figure is 50,000 direct labor hours.
The plant manager has been asked to submit a bid and has assembled the following data on the proposed job:
Direct Materials $3,700
Direct labor (1,000 hours) $7,000
Overhead ?
Number of material moves 10
Number of inspections 5
The plant manager has been told that many companies use an activity-based approach to assign overhead to jobs. Before submitting her bid, she wants to assess the effects of this alternative approach.
a. Compute the total cost of the potential job using traditional overhead application (i.e. direct labor hours to assign overhead)
b. Refer to the above information; compute the total cost of the job using the cost drivers to allocate overhead, (i.e. number of material moves to allocate material handling costs and the number of inspections to allocate the quality inspection cost).