Figure 4
Wheat 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, 20,000 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 15 percent.
Estimates for the proposed job are as follows:
In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver--direct labour hours. 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 4. If Wheat Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 15 percent, the company's bid would be
A) £17,480
B) £16,583
C) £13,110
D) £12,765

Question

Figure 4
Wheat 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, 20,000 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 15 percent.
Estimates for the proposed job are as follows:
  In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver--direct labour hours. 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 4. If Wheat Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 15 percent, the company's bid would be 
A) £17,480 
B) £16,583 
C) £13,110 
D) £12,765

Quizplus · Accepted Answer

Using the traditional volume-based cost driver (direct labor hours), the predetermined overhead rate can be calculated as:
Total Expected Overhead Costs / Total Expected Direct Labor Hours
= (£12,000 + £10,000 + £8,000 + £6,000) / 20,000
= £1 per direct labor hour

For the proposed job, the estimated direct labor hours are 1000, so the overhead cost allocated to the job would be:
1000 hours x £1 per hour = £1,000

Full manufacturing cost can be calculated by adding together the direct materials, direct labor, and overhead costs. From the estimates provided:
Direct materials cost = £3,000
Direct labor cost = 1000 hours x £10 per hour = £10,000
Overhead cost = £1,000

Full manufacturing cost = £3,000 + £10,000 + £1,000 = £14,000

Adding 15% to the full manufacturing cost gives:
£14,000 x 0.15 = £2,100
Total bid = £14,000 + £2,100 = £16,100

Alternatively, if activity-based costing is used, the overhead costs would be allocated based on the activity levels for each cost driver. The overhead costs allocated to the proposed job would be:
Activity 1: £8 per setup x 10 setups = £80
Activity 2: £2 per machine hour x 50 machine hours = £100
Activity 3: £3 per inspection x 2 inspections = £6
Activity 4: £5 per batch x 4 batches = £20
Total overhead = £206

Full manufacturing cost = £3,000 + £10,000 + £206 = £13,206

Adding 15% to the full manufacturing cost gives:
£13,206 x 0.15 = £1,981
Total bid = £13,206 + £1,981 = £15,187

Therefore, the best choice is B (£16,583) because it uses the predetermined overhead rate based on direct labor hours as the cost driver and adds a 15% markup to the full manufacturing cost.

Figure 4 Wheat Manufacturing Has Four Categories of Overhead. the Four Categories