Assessment: Management Accounting
Product Costing
ASR Group of Companies Ltd has four categories of overheads. The four categories and theexpected overhead costs for each category for next year are as follows:
|
Maintenance
|
$150,000
|
|
Materials handling
|
70,000
|
|
Set-ups
|
60,000
|
|
Inspection
|
100,000
|
Currently, overheads are applied using a predetermined overhead rate based uponbudgeted direct labour hours. For next year, 60,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The factory manager feelsthat obtaining this job would result in new business in future years. Usually bids are basedupon full manufacturing cost plus 40%.
Estimates for the proposed job are as follows:
|
Direct materials
|
$6,000
|
|
Direct labour
|
$8,500
|
|
Number of materials moves
|
9
|
|
Number of inspections
|
7
|
|
Number of set-ups
|
4
|
|
Number of machine hours
|
400
|
In the past, full manufacturing cost has been calculated by allocating overheads using avolume-based cost driver - direct labour hours. Mr AR the director has heard of a new wayof applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows:
|
Machine hours
|
18,000
|
|
Material moves
|
6,000
|
|
Set-ups
|
3,000
|
|
Quality inspections
|
9,000
|
Required:
1. Determine the amount of overheads that would be allocated to the proposed job if directlabour hours are used as the volume-based cost driver.
a. Determine the total cost of the proposed job.
b. Determine the company's bid if the bid is based upon full manufacturing cost plus 40%.
Total Cost (Traditional approach)
Direct material $ 6000.00
Direct Labour $ 8500.00
Manufacturing overheads (3596 X 6.33) $ 22 762.68
Total $ 37 262.68
Add 40% $ 14 905.07
Bid Amount $ 52 167.75
Calculation of overhead rate
Overhead rate
Maintenance: $150 000
Materials handling: $70 000
Set-ups: $ 60 000
Inspection: $100 000
Total $380 000
Direct Labour hour 60 000
Overhead Rate (380000/60000) 6.33
Determine the amount of overheads that would be applied to the proposed job if activity-basedcosting is used.
c. Determine the total cost of the proposed job if activity-based costing is used.
d. Determine the company's bid if activity-based costing is used and the bid is based uponfull manufacturing cost plus 30%.
Total Cost proposed
Direct Material $6000.00
Direct Labour $8500.00
Maintenance: ($150 000/18 000*400) $3333.33
Materials handling: ($70 000/6 000*9) $ 105.00
Set-ups: ($60 000/3 000*4) $ 80.00
Inspection: ($100 000/9 000*7) $ 77.77
Total $ 18 096.10x 30%
$ 23 524.93
Overhead assigned:
$8.33 * 400 $ 3 333.33
$11.66 * 9 $105.00
$20.00 * 4 $ 80.00
$11.11 * 7 $ 77.77
$ 3596.10
|
Direct Material
|
$ 6 000.00
|
|
Direct Labour
|
$ 8 500.00
|
|
Manufacturing overheads (3596x 6.33)
|
$ 22 762.68
|
|
Total
|
$ 37 262.68
|
|
Add 30%
|
$ 11 178.80
|
|
Bid Amount
|
$ 48 441.48
|
2. Which product costing method produces the more accurate costing? Briefly explain.
- Activity - based costing produces more accurate cost information and more competitive bid.