The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:
The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct labour hours. The following data have been assembled for use in developing a bid for a proposed job:
Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500.
Using activity-based costing and the appropriate activity drivers, the total cost of the potential job would be

A) £1,200.
B) £1,800.
C) £3,700.
D) £3,875.

Question

The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:
The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct labour hours. The following data have been assembled for use in developing a bid for a proposed job:
 Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500.
Using activity-based costing and the appropriate activity drivers, the total cost of the potential job would be

A) £1,200. 
B) £1,800. 
C) £3,700. 
D) £3,875.

Quizplus · Accepted Answer

To calculate the total cost of the potential job using activity-based costing, we need to allocate the overhead costs to the job based on their activity drivers.

Maintenance overhead cost per machine hour = £1,500 / 10,000 machine hours = £0.15 per machine hour
Inspection overhead cost per inspection = £1,500 / 1,500 inspections = £1 per inspection

Total Maintenance overhead cost = £0.15 x 5,000 machine hours = £750 
Total Inspection overhead cost = £1 x 100 inspections = £100

Direct labour cost for the job = 100 hours x £20 per hour = £2,000

Total cost of the potential job = Direct labour cost + Total overhead cost
= £2,000 + £750 + £100
= £3,850

Therefore, the best choice is C (£3,700), which is the closest option to the calculated cost of the potential job using activity-based costing.

The Xiang Plant Has Two Categories of Overhead: Maintenance and Inspection