Question
Baker Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance
Baker Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows:
Maintenance $140,000
Materials handling $ 60,000
Setups $ 50,000
Inspection $100,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted.
Estimates for the proposed job are as follows:
Direct materials | $5,000 |
Direct labour (750 hours) | $7,500 |
Number of materials moves | 8 moves |
Number of inspections | 5 inspections |
Number of setups | 3 setups |
Number of machine hours | 300 MHs. |
In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver; the direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.
Respective to the four cost categories, the expected activity for the four activity-based cost drivers that would be used are as follows:
Machine hours | 16,000 hours |
Material moves | 4,000 moves |
Setups | 2,000 setups |
Quality inspections | 8,000 inspections |
REQUIRED
- Briefly explain why direct labour hours is regarded as a volume-based cost driver. ( 2 marks)
- Using direct labour hours as the volume-based cost driver
- Calculate the overhead rate (label the rate correctly)
(2 marks)
- Determine the total cost of the proposed job. (4 marks)
- Using activity-based costing
- Calculate the activity rates of the four cost pools (label the rates correctly) (4 marks)
- Determine the total cost of the proposed job. (5 marks)
- Which product costing method produces the more accurate cost assignment? Briefly explain.
(3 marks)
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