Reference no: EM131792150
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:
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Maintenance
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$150,000
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Materials handling
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70,000
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Set-ups
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60,000
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Inspection
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100,000
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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:
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Direct materials
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$6,000
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Direct labour
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$8,500
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Number of materials moves
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9
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Number of inspections
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7
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Number of set-ups
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4
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Number of machine hours
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400
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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:
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Machine hours
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18,000
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Material moves
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6,000
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Set-ups
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3,000
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Quality inspections
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9,000
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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
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Direct Material
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$ 6 000.00
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Direct Labour
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$ 8 500.00
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Manufacturing overheads (3596x 6.33)
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$ 22 762.68
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Total
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$ 37 262.68
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Add 30%
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$ 11 178.80
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Bid Amount
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$ 48 441.48
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2. Which product costing method produces the more accurate costing? Briefly explain.
- Activity - based costing produces more accurate cost information and more competitive bid.
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