QUESTION 2

ABC problem

Company LSD LTD has 4 types of overhead . The four categories and

expected costs for each category for next year are listed below

Company LSD LTD

Activity cost

Setups cost $150,000

Inspection cost $90,000

Maintenance cost $120,000

Material Handling cost $ 82,000

Actual overhead Cost $30,000

Estimates for the proposed job [Job #23] are as follows

Direct Materials $6,000

DL (1000 hours) $10,000

Machine Hours [maintenance cost] 500

# of material moves 12

# of setups 5

# of inspections 10

Units produced 240

The company has been asked to submit a bid for a proposed job. The plant

manager thinks getting this job would result in new business in future

years. Usually bids are based upon full manufacturing cost plus 30%.

In the past , full manufacturing cost has been calculated by allocating

overhead using volume based cost driver [[DLH]. 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 :

Cost Drivers

Machine Hours 15,000

Material Moves 4,600

Setups 3,500

Quality Inspections 5,000

Required :

Part 1

1. Calculate the predetermined rates using the Functional based costing

2. Determine the amount of overhead that would be applied to the

proposed project if Functional based costing method is used

3. Determine the total cost of the proposed job using ABC

4. Calculate the unit cost using FBC

5. What bid price is the company going to use according to its FBC

policy?

Part 2

1 Calculate the predetermined rates using the activity based costing .

2 Determine the amount of overhead that would be applied to the

proposed project if activity based drivers are used

3 Determine the total cost of the proposed job using ABC .

4 Calculate the unit cost using ABC.

5 What bid price is the company going to use according to its policy?

6 Has the company over-applied or under-applied using FBC and ABC?

How did you come to this conclusion?