Newcastle Machining produces parts for the steel industry. It has 3 categories of overhead costs: machine operating costs, production-engineering and inspecting costs. The costs expected for these categories for the coming year are as follows (note K represents '000s):
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Machining
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$435K
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Production-engineering
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215K
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Inspecting
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150K
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Total
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800K
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The plant currently uses machine hours to apply overhead. Expected capacity is 100K machine hours. Tom, the plant manager, has been asked to submit a bid on a potential job. He provides you with the following data for this job:
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Direct materials
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$8K
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Direct labour
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$12K
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Overhead
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$?
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Number of inspections
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1
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Number of machine hours
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2K
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Production-engineering hours
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10
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Tom has been told that other firms will be competing for this job as well. Most of his competitors are using the ABC overhead allocation method. He wants to compare his bid using his existing and ABC approaches. He estimates that there will be 6K inspections, and 10Kproduction-engineering hours consumed in the plant next year.
Required. Round off all rates etc to two decimal places:
1. Compute the total cost of the potential job using machine hours to assign overhead. Assume that the bid price is based on full manufacturing cost plus 25% mark up. What is Tom's bid price?
2. Compute the total cost of the job using the number of inspections to assign inspection costs, production-engineering hours to assign engineering costs, and machine hours to assign machining costs. Assume the same bid pricing approach as in (1): what is Tom's bid price?
3. Which approach (1 or 2 above) do you think better reflects the real cost of the job? Explain in full: you must apply the relevant theoretical concepts to the case-facts provided. You cannot state the theoretical concepts alone, without relating it to the case-facts.
4. The production manager suggested that inspection hours rather number of inspections would provide a better cost assignment for jobs. The plant can carry out 12K inspection hours per year. The job in question should consume 60 inspection hours. Calculate the effect of this change on the job's bid price. Explain why inspection hours is a better or worse driver than number of inspections.
5. See rubric at the end of the assignment: it shows howQ.5 will be assessed.
5.i) What is the hierarchy of overhead costs and activities?
Use your own words to explain the elements of the hierarchy - do notmerely reproduce direct quotes from the notes given in the lecture questions handout, or any textbook.
5.ii) How should the hierarchy be used to allocate overhead costs? How will the hierarchy assist management to control overhead costs?
5.iii) Hospitals have high overhead costs and use casemix principles to allocate and control administrative and medical overhead costs. Explain in full if overhead costs in hospitals could better be managed if the hierarchy of costs and activities were used to allocate the overhead costs of hospitals?