Figure 3
The Overdale 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 80,000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job:
Total expected machine hours for all jobs during the year are 40,000, and the total expected number of inspections is 2,500.
-Refer to Figure 3 above. Using activity-based costing and the appropriate cost drivers, the total cost of the potential job would be
A) £9,230
B) £8,180
C) £2,250
D) £1,680

Question

Figure 3
The Overdale 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 80,000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job:
  Total expected machine hours for all jobs during the year are 40,000, and the total expected number of inspections is 2,500.
-Refer to Figure 3 above. Using activity-based costing and the appropriate cost drivers, the total cost of the potential job would be
A) £9,230 
B) £8,180 
C) £2,250 
D) £1,680

Quizplus · Accepted Answer

Using activity-based costing, we need to calculate the overhead cost per machine hour and per inspection, and then add these costs to the direct labor cost for the job.

Maintenance overhead cost per machine hour = £2,160 / 40,000 machine hours = £0.054 per machine hour
Inspection overhead cost per inspection = £5,000 / 2,500 inspections = £2.00 per inspection

Total overhead cost for the job = (40,000 machine hours x £0.054 per machine hour) + (2,500 inspections x £2.00 per inspection) 
= £2,160 + £5,000 
= £7,160

Total cost for the job = direct labor cost + overhead cost 
= (120 direct labor hours x £50 per hour) + £7,160 
= £6,000 + £7,160 
= £13,160

Therefore, the total cost of the potential job using activity-based costing would be £8,180 (option B).

Figure 3 the Overdale Plant Has Two Categories of Overhead: Maintenance and Maintenance