Question - The job costing system at Smith's Custom Framing has five indirect cost pools ( purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs; Job 215, an order of 15 intricate personalized frames, and Job 325, an order of 6 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job- costing system and a newly- designed activity- based job- costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows:
Budgeted Overhead Activity Driver Budgeted Quantity of Activity Driver
Purchasing $ 70,000 Purchase orders processed 2,000
Material handling 87,500 Material moves 5,000
Machine maintenance 237,300 Machine- hours 10,500
Product inspection 18,900 Inspections 1,200
Packaging 39,900 Units produced 3,800
$ 453,600
Information related to Job 215 and Job 325 follows. Job 215 incurs more batch- level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325.
Job 215 Job 325
Number of purchase orders 25 8
Number of material moves 10 4
Machine- hours 40 60
Number of inspections 9 3
Units produced 15 6
1. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine- hours.
2. Compute the total overhead allocated to each job under an activity- based costing system using the appropriate activity drivers.
3. Explain why Smith's Custom Framing might favor the ABC job- costing system over the simple job-costing system, especially in its bidding process.