Reference no: EM13388

King Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows:

Maintenance	$70,000
Materials handling	30,000
Setups	25,000
Inspection	50,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 50,000 direct labor hours are budgeted for next year.

The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually, bids are based upon full manufacturing cost plus 30 percent.

Estimates for the proposed job are as follows:

Direct materials	$2,500
Direct labor (750 hours)	$3,750
Number of machine hours	300
Number of material moves	8
Number of setups	3
Number of inspections	5

In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based driver e.g. direct labor hours. The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.

Expected activity for the four activity drivers that would be used are:

Machine hours	16,000
Material moves	4,000
Setups	2,000
Quality inspections	8,000

Required:

1. Determine the company's bid if direct labor hours are used as the volume-based driver and the bid is based upon full manufacturing cost plus 30 percent.
2. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent.
3. Which product costing method produces the more competitive bid? And why?
   

Problem :- 2

The Knapp Company needs to predict the labor cost in producing small carrot patch dolls. The following production information is available:

Year	Dolls Produced	Labor Hours	Labor Dollars
2005	1,150	850	$17,000
2006	1,600	975	23,400
2007	1,100	800	25,600
2008	2,100	1,150	36,800
2009	1,500	950	34,200
2010	1,300	875	35,000

The technology has not changed since 2005. Wage rates have steadily increased since 2005; however, management expects no further wage increases in 2011.

Required:

1. Select the appropriate independent variable for predicting labor cost. Explain the reason for your selection.
2. Develop an equation to predict for 2011 the labor cost of producing carrot patch dolls. Use the high-low method.
3. Estimate the labor cost of producing 3000 carrot patch dolls for 2011 if 3,000 dolls are expected to produce.