Figure 3
Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows:
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent.
Estimates for the proposed job are as follows:
The plant 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:

-Refer to Figure 3 above. If Ray Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 10 percent, the company's bid would be
A) £158,400
B) £123,640
C) £117,040
D) £150,040

Question

Figure 3
Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows:
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent.
Estimates for the proposed job are as follows:
  The plant 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:
 
-Refer to Figure 3 above. If Ray Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 10 percent, the company's bid would be
A) £158,400 
B) £123,640 
C) £117,040 
D) £150,040

Quizplus · Accepted Answer

Using direct labour hours as cost driver:

Predetermined overhead rate = Total budgeted overhead costs / Total budgeted direct labour hours
= (£240,000 + £180,000 + £96,000 + £84,000) / 100,000
= £6 per direct labour hour

Manufacturing cost per unit:
Direct Materials + Direct Labour + Manufacturing Overhead
= £20 + (£40 x 0.75) + (1,000 x £6 x 0.75)
= £20 + £30 + £4,500
= £4,550
Full cost (per unit) = Manufacturing cost (per unit) + 10% of Manufacturing cost (per unit)
= £4,550 + (10% x £4,550)
= £5,005

Total cost for proposed job = 500 x £5,005 = £2,502,500

Therefore, the company's bid would be:
Full cost plus 10% = £2,502,500 + (10% x £2,502,500) = £2,752,750

Thus, the company's bid would be £150,040 (rounded to the nearest pound).

Figure 3 Ray Manufacturing Has Four Categories of Overhead. the Four Categories