Question 1

Real Ltd. has been asked to submit a bid on two prospective jobs, one for Fake Racing a rally team from Trinidad and the other for Hoax Racing of Barbados. The company uses a job costing system and applies overheads using machine hours. Total overhead for the year is expected to be $450 000, and it is expected that 50, 000 machine hours will be worked.

Addition information relating to the prospective jobs is as follows:

	Fake Racing	Hoax Racing
Direct materials	$7 500	$10 000
Direct labour	$13 000	$12 500
Number of inspections	4	2
Number of set-ups	3	1
Number of machine hours	2 000	4 500
Number of engineering hours	130	50

1. Using the traditional job costing system, calculate the total cost of each job. Show the calculation of the OAR. (7 marks)

Real Ltd is concerned that the company may be over-or-under-pricing the jobs on which they bid. The company has decided to use activity based costing to estimate the cost of future jobs. Real Ltd has assembled the following information:

	Costs ($)	Cost driver	Total Capacity
Machining	200 000	Machine hours	50 000 machine hrs
Set-up	35 000	No. of set-ups	200 set-ups
Engineering	125 000	No. of engineering hours	6 250 engineering hrs
Inspection	90 000	No. of inspections	7 500 inspections
Total Cost	450 000

B. Compute the activity rate for each activity. (6 marks)

C. Compute the total cost of each job using activity based costing. (12 marks)

(Total 25 marks)