Problem 2

For 2022, Highland again estimates the following overhead costs:

Machinery maintenance $81,350

Utilities $246,380

Supervision $146,000

Materials handling cost $51,000

Building occupancy costs $69,870

Indirect materials $53,650

For 2022, Highlands accountant proposes allocating overhead to jobs using activity based costing. Her study of various costs and their cost drivers indicates that the best cost driver for materials handling cost and indirect materials is direct materials cost. For supervision the cost driver is direct labor hours, for machinery maintence and half of utilities the driver is machine hours. The occupancy costs and other half of utilities are driven by square feet.

The accountant estimates 53,000 dlh, 36,000 machine hours and $4,000,000 in direct materials cost for 2022. The building has 25,000 sq ft of space used to build yachts.

Ricky Ricardo calls and wants a custom built 50 ft yacht for his wife Lucy. The designer estimates that Rickys design will require the following inputs into the building process:

Dir Materials $1,536,000

Dir labor hours 14,620 (paid at $24/hr)

Machine hours 9,240

Square feet occupied 9,000 (for 6 months - half of the year)

REQUIREMENTS:

If Highland is going to charge 140% of the total cost of the yacht to Ricky, what should the bid for the job be as calculated using ABC. Show all calculations.

Show the journal entries for each of the transactions. Please explain as well.