Bernelli Machining operates as a job shop making various metal parts for tractors. It has several large customers across the country who order parts when their own facilities run out of capacity. Each job is unique, requiring its own labor, materials, and support activities. Bernelli currently charges $5,000,000 of plant and back office overhead out on 80,000 machine hours. Its customers, however, are starting to ask Bernelli to justify what he charges them, so Joe Bernelli is thinking about instituting an activity-based cost system. All labor is included in one of the activity pools. The following table contains the information Joe has accumulated on his company ’s operations:

Bernelli has just completed three jobs. The details for these jobs are contained in the table below.

REQUIRED:

a. Calculate the current overhead rate per machine hour.

b. Calculate the cost of each of the jobs using machine hours as the rate.

c. Joe targets a 25% margin on each job he does. How much would he charge for each of these jobs?

d. Calculate the ABC charging rates.

e. Recalculate the costs for each job using these new rates.

f. Once again calculate the price Joe would charge for each of these jobs.

g. What does a comparison of the results suggest? Be specific.

Transcribed Image Text:

Bernelli Machining Activity Driver Driver Frequency Cost of Activity Machining Nachine hours 80,000 $2,800,000 Set-up Set- up hours 6,000 $300,000 Inspection Inspection hours 10,000 $350,000 Shipping Shipments made 15,000 $630,000 Customer service Orders taken 10,000 $360,000 Invoicing Invoices mailed 20,000 $560,000 Total $5,000,000