Problem:
1. Assume that a plant has two categories of overhead: material handling and quality inspection. The costs expected for these categories for the coming year are as follows.
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Material handling
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$100,000
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Quality inspection
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300,000
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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:
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Potential Job
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Direct materials
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$3,700
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Direct labor (1,000 hours)
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$7,000
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Overhead
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$?
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Number of material moves
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10
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Number of inspections
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5
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The manager has been told that many competitors use an ABC approach to assign overhead to jobs. Before submitting his bid, he wants to assess the effects of this alternative approach. He estimates that the expected number of material moves for all jobs during the year is 1,OOO; he also expects 5,000 quality inspections to be performed.
(a) Compute the total cost of the potential job using direct labor hours to assign overhead.
Assuming the bid price is full manufacturing cost plus 25 percent, what would be the manager's bid?
(b) Compute the total cost of the job using the number of material moves to allocate material-handling costs and the number of inspections to allocate the quality inspection costs. Assuming a bid price of full manufacturing cost plus 25 percent, what should be his bid using this approach?
(c) Which approach do you think best reflects the actual cost of the job? Explain.