ABC, costs of quality. (J. Watson) Stanford Industries currently uses a normal job-cost- ©

ing system with a single overhead cost pool. It supplies parts to the aeronautic industry, 1) 4 Overhead allocated and as a result, quality control is paramount. It currently applies the indirect costs of qual- contract, $700,500 ity control on the basis of direct labour cost at a rate of 150%. Most of the company’s work is awarded by bidding on cost-plus contracts. Recently, Stanford has come under increasing pressure to justify its costs. It is concerned that its single allocation rate may be distorting some of its product bids.

In an analysis of its quality-control costs, it has determined that there are four activities, and it has determined the following cost drivers and rates based on annual projections:

REQUIRED 1. Calculate the amount of overhead that would be allocated to the contract

a. Using the current costing system that allocates overhead on the basis of direct labour cost.

b. Using an ABC een! Activity-Based Costing and 2. Do you recommend a switch to ABC? Why or why not?LO1

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Activity Cost Driver Incoming materials testing and inspection In-process testing Number of types of part Number of units produced Activity Rate $36 per type $6 per unit produced and inspection Final product testing Number of units inspected $25 per unit inspected and inspection Testing supplies Direct materials (DM) cost 30% of DM cost Stanford has decided to review one of its recently completed contracts. Direct labour on the job was $467,000 and the direct material cost was $392,000. A review of the job's activ- ities showed that: 50 different types of parts were used. A total of 40,000 units were produced. 30% of all units produced were inspected upon completion.