Assume that Kent Manufacturing has two categories of overhead: material handling

Question

Assume that Kent Manufacturing has two categories of overhead: material handling and quality inspection. The costs expected for these categories for the coming year are as follows: The plant currently applies overhead using direct labor hours. and expected actual capacity. This figure is 50, 000 direct labor hours. Carla Wells, the plant manager, has been asked to submit a bid and has assembled the following data on the proposed job: Carla has been told that many companies use an activity-based approach to assign overhead to jobs. Before submitting her bid. she wants to assess the effects of this alternative approach. REQUIRED: a. Compute the total cost of the potential job using traditional overhead application (i.e., direct labor hours to assign overhead). Make sure to include direct materials, direct labor, and applied overhead in your calculation of total cost of the potential job. b. Refer to the above information; compute the total cost of the job using the cost drivers to allocate overhead, (i.e., number of material moves to allocate material handling costs and the number of inspections to allocate the quality inspection costs). Again, make sure to include direct materials, direct labor, and applied overhead in your calculation of total cost of the potential job.

Explanation / Answer

a. Traditional Overhead Rate = (100000+300000)/50000 = $8/hour
Overheads Applied to the job = 1000*8 = $8,000
Total Cost of the potential job = 3700+7000+8000 = $18,700

b. Overhead rates based on Activity Based Costing
Material Handling Rate = 100000/500 = $200 per material move
Quality Inspection rate = 300000/200 = $1,500 per inspection
Overheads Applied to the job = (10*200) + (5*1500) = $9,500
Total Cost of the potential job = 3700+7000+9500 = $20,200

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