Figure 4-13 The Molotov plant of Kaboom Industries 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 labor hours and expected capacity of 50,000 direct labor 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.
Refer to Figure 4-13. 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

Figure 4-13 The Molotov plant of Kaboom Industries 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 labor hours and expected capacity of 50,000 direct labor 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.
Refer to Figure 4-13. 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

Using activity-based costing, we need to calculate the overhead costs for each activity separately and then allocate them to the job based on the activity drivers given.

Maintenance overhead cost = $60,000 
Expected maintenance hours = 2,000 
Activity rate = $60,000 / 2,000 hours = $30 per maintenance hour

Inspection overhead cost = $40,000 
Expected number of inspections = 1,500 
Activity rate = $40,000 / 1,500 inspections = $26.67 per inspection

Total overhead cost for the job: 
Maintenance cost = 20 hours x $30 per hour = $600 
Inspection cost = 3 inspections x $26.67 per inspection = $80.01 
Total overhead cost = $600 + $80.01 = $680.01

Direct labor cost for the job = 100 hours x $20 per hour = $2,000

Total cost of the potential job using activity-based costing = Total overhead cost + Direct labor cost = $680.01 + $2,000 = $3,680.01

Therefore, the best choice is C, $3,700, which is the closest option to our calculated total cost.

Figure 4-13 the Molotov Plant of Kaboom Industries Has Two