Hi

Can someone help me how to solve this information below

Recently, the sales and marketing manager for Pasifika Company, Mr. Reece Rooney couldn't understand

the result of two bids that the firm has submitted. According to the company's policy, a 50 percent mark-up

is added to the full manufacturing cost when calculating the bid. One particular job (Job A01) had been

rejected by a prospective customer since the proposed bid was $4 per unit higher than the winning bid.

However, a customer has accepted a second job (Job B01) and was pleased with the favorable bid. This

customer revealed that Pasifika's price was $44 per unit lower than the next-lowest bid.

Reece knew that the implementation of the cost leadership strategy has resulted in Pasifika's competitive

advantage, therefore he assumed that the issue must be related to cost allocation procedures. When Reece

further investigated the matter, he found that Pasifika used a pre-determined plantwide overhead rate based

on direct labor hours. The budgeted data used to calculate this rate follows:

Department A Department B Total

Fixed Overhead $300,000 $1,400,000 $1,700,000

Variable Overhead $1 per DLH $5 per MH

Direct labor hours 200,000 50,000 250,000

Machine hours 20,000 120,000 140,000

Additional information on the two jobs are as follows:

Job A01

Department A Department B Total

Direct labor hours 5,000 1,000 6,000

Machine hours 200 500 700

Prime costs $100,000 $20,000 $120,000

Units produced 14,400 14,400 14,400

Job B01

Department A Department B Total

Direct labor hours 400 600 1,000

Machine hours 200 3,000 3,200

Prime costs $10,000 $40,000 $50,000

Units produced 1,500 1,500 1,500

In his attempt to investigate the costing of the two jobs, Mr. Rooney discovered that the overhead costs in

the two departments are different. In particular, the overhead costs of Department B were higher than

Department A since it uses more equipment and therefore has higher maintenance, higher power

consumption, higher depreciation, and higher setup costs. Additionally, he did some reading on overhead

cost allocation methods and found that allocating support department cost appropriately can result to

increase accuracy of the product cost. Hence he collected the following information on four support

departments as follows:

Maintenance Power Setups General

Factory

Dept.

A

Dept.

B

Fixed overhead $400,000 $120,000 $100,000 $500,000 $100,000 $650,000

Variable overhead $100,000 $105,000 $50,000 $125,000 $100,000 $150,000

Maintenance hours - 1,500 500 - 1,000 7,000

Kilowatt-hours 4,500 - - 15,000 10,000 50,000

Direct labor hours 10,000 12,000 6,000 8,000 200,000 50,000

Number of setups - - - - 40 160

Square feet 25,000 40,000 5,000 15,000 35,360 94,640

The following allocation bases (cost drivers) seemed reasonable:

Support Department Allocation Base

Maintenance Maintenance hours

Power Kilowatt-hours

Setups Number of setups

General Factory Square feet

REQUIRED

1. Advise Mr. Rooney on potential strategies he would implement to compete effectively on cost

leadership strategy.

2. Calculate the unit bids for the two jobs using a plantwide OH rate based on direct labour hours.

3. (i) Using the sequential (step-down) method, calculate the departmental overhead rates using

direct labor hours for Department A and machine hours for Department B.

(ii) What would the unit bids for Job A01and Job A02 have been if these overhead rates had

been in effect? (Round-off the allocation ratios to 3 decimal places before you allocate the

support department costs

4. Discuss any recommendations you would give to Rooney regarding the method of allocating

overhead cost.