Part (i)

Light Industries Ltd produces two types of flashlights: Regular and Deluxe. Three activities have been identified in the production process: set-ups, machining and packing. Resource drivers have been used to assign costs to each activity. The overhead rates, their costs and other related data follows:

Product

Machine hours

Set-ups

Packing orders

Regular

2,000

100

600

Deluxe

3,000

400

2,400

Cost

$50,000

$4,000

$8,000

1. Classify the overhead activities as unit-level, batch-level, product-level or facility- level.

1. Identify the most appropriate activity driver for each pool and compute the pool rate.

1. Assign the overhead costs to each product using the pool rates computed in requirement B.

Part (ii)

Baker Manufacturing Ltdhas four categories of overheads. The four categories

and the expected overhead costs for each category for next year are as follows:

$

Maintenance

140,000

Materials handling

60,000

Set-ups

50,000

Inspection

100,000

Currently, overheads are applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted.

The company has been asked to submit a bid for a proposed job. The factory manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 30%.

Estimates for the proposed job are as follows:

Direct materials

$5,000

Direct labour (750 hours)

$7,500

Number of materials moves

8

Number of inspections

5

Number of set-ups

3

Number of machine hours

300

In the past, full manufacturing cost has been calculated by allocating overheads using a volume-based cost driver - direct labour hours. The factory manager has heard of a new way of 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:

Machine hours

16,000

Material moves

4,000

Set-ups

2,000

Quality inspections

8,000

Required:

A.

Determine the amount of overheads that would be allocated to the proposed job if direct labour hours are used as the volume-based cost 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%.

B.

Determine the amount of overheads that would be applied to the proposed job 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%.

C.

Which product costing method produces the more competitive bid?

D.

Briefly discuss the reasons why activity based costing system might be preferred to functional or conventional costing systems.