Ivory, Inc is a growing manufacturer focusing on the production of specific household tools. The company is considering applying the activity-based costing (ABC) system after the managers attending a seminar claiming the advantages of ABC. Currently, overhead is applied using a predetermined overhead rate based on the budgeted direct labor hours. For the next year, 50,000 direct labor hours are budgeted based on the historical use and demand prediction.

The company has engaged with a consulting firm to help designed the ABC system. Based on several interviews and inquiries, the consultants identified 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

The company has been asked to submit a bid for a proposed job. Obtaining this job would result in new business in future year. Usually, bids are based upon full manufacturing cost plus 30 percent. Below are the estimates for the proposed job:

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

Number of orders 20

Number of packaging hours 100

In the previous years, full manufacturing costs were calculated by allocating overhead using a volume-based activity driver: direct labor hours. The plant manager thinks that it is the right time to apply ABC system that uses cost pools and activity drivers. Below are the data for several activities:

Machine hours 16,000

Material moves 4,000

Setups 2,000

Quality inspections 8,000

Orders 3,000

Packaging hours 1,000

Required:

a. Determine the amount of overhead that would be allocated to the proposed job if direct labor hours are used as the volume-based activity driver. Determine the total cost of the proposed job. Determine the company's bid if the bid is based upon full manufacturing cost plus 30 percent.

b. Determine the amount of overhead that would be applied to the proposed project if activity-based costing is used. Determine the total cost of the proposed job if activity-based costing is used. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent.

c. Based on your calculation, which product costing method produces the more accurate cost information and competitive bid? Explain your answer