Concept explainers
Firenza Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is:
Previously, Sanjay Bhatt, Firenza Company’s controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 50,000. Sanjay has been reading about activity-based costing, and he wonders whether or not it might offer some advantages to his company. He decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 500 setups, and 2,500 engineering hours.
Sanjay has been asked to prepare bids for two jobs with the following information:
The typical bid price includes a 40 percent markup over full
Required:
- 1. Calculate a plantwide rate for Firenza Company based on machine hours. What is the bid price of each job using this rate?
- 2. Calculate activity rates for the four overhead activities. What is the bid price of each job using these rates?
- 3. Which bids are more accurate? Why?
1.
Calculate the plant wide overhead rate for F Company based on machine hours and bid price for each job using plant wide overhead rate.
Explanation of Solution
Plant wide overhead rate: Plant wide overhead rate is the rate a company uses to allocate its manufacturing overhead costs to products and cost centers.
Calculate the overhead rate:
Working note:
- a) Calculate the budgeted overhead.
Calculate the bid price for job 1 and job 2.
F company | ||
Particulars | Job 1 | Job 2 |
Direct materials | $4,500 | $9,340 |
Direct labor | 1,200 | 2,100 |
Overhead | $650 (b) | $650 (c) |
Total manufacturing cost | $6,350 | $12,090 |
Add: 40% markup | 2,540 (d) | 4,836 (e) |
Bid price | $8,890 | $16,926 |
Table (1)
Working notes:
- b) Calculate the overhead for job 1.
- c) Calculate the overhead for job 2.
- d) Calculate the 40% markup for job 1.
- e) Calculate the 40% markup for job 2.
2.
Calculate the activity rate for all the overhead activities and bid price for both jobs using activity price.
Explanation of Solution
Calculate the purchasing rate per order.
Calculate the setup cost rate per setup.
Calculate the engineering rate per engineering hour.
Calculate the other cost rate per machine hour.
Calculate the bid price for job 1 and job 2.
F company | ||
Particulars | Job 1 | Job 2 |
Direct materials | $4,500 | $9,340 |
Direct labor | $1,200 | $2,100 |
Overhead: | ||
Purchasing | 120 (f) | 160 (g) |
Setup | 225 (h) | 300 (i) |
Engineering | 810 (j) | 180 (k) |
Other | 160 (l) | 160 (m) |
Total manufacturing cost | $7,015 | $12,240 |
Add: 40% markup | 2,806 (n) | 4,896 (o) |
Bid price | $9,281 | $17,136 |
Table (2)
Working notes:
- f) Calculate the purchasing overhead for job 1.
- g) Calculate the purchasing overhead for job 2.
- h) Calculate the setup overhead for job 1.
- i) Calculate the setup overhead for job 2.
- j) Calculate the engineering overhead for job 1.
- k) Calculate the engineering overhead for job 2.
- l) Calculate the other overhead for job 1.
- m) Calculate the other overhead for job 2.
- n) Calculate the 40% markup for job 1.
- o) Calculate the 40% markup for job 2.
3.
Identify the accurate bid price and explain the reason behind it.
Explanation of Solution
Assigning the overhead using activity based approach shows the accurate cost figure because most of the overheads are non-unit level and there is a variety of products.
Want to see more full solutions like this?
Chapter 5 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- The controller for Muir Companys Salem plant is analyzing overhead in order to determine appropriate drivers for use in flexible budgeting. She decided to concentrate on the past 12 months since that time period was one in which there was little important change in technology, product lines, and so on. Data on overhead costs, number of machine hours, number of setups, and number of purchase orders are in the following table. Required: 1. Calculate an overhead rate based on machine hours using the total overhead cost and total machine hours. (Round the overhead rate to the nearest cent and predicted overhead to the nearest dollar.) Use this rate to predict overhead for each of the 12 months. 2. Run a regression equation using only machine hours as the independent variable. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the intercept and x-coefficient to the nearest cent and predicted overhead to the nearest dollar.) Is this flexible budget better than the budget in Requirement 1? Why or why not?arrow_forwardBig Mikes, a large hardware store, has gathered data on its overhead activities and associated costs for the past 10 months. Nizam Sanjay, a member of the controllers department, believes that overhead activities and costs should be classified into groups that have the same driver. He has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity, since these three activities are all driven by the number of receiving orders. The 10 months of data shown below have been gathered for the receiving activity. Required: 1. Prepare a scattergraph, plotting the receiving costs against the number of purchase orders. Use the vertical axis for costs and the horizontal axis for orders. 2. Select two points that make the best fit, and compute a cost formula for receiving costs. 3. Using the high-low method, prepare a cost formula for the receiving activity. 4. Using the method of least squares, prepare a cost formula for the receiving activity. What is the coefficient of determination?arrow_forwardAdam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for the next year: If Adam uses the step-down (sequential) method, beginning with the Maintenance Department, to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be: a. 407,500. b. 422,750. c. 442,053. d. 445,000.arrow_forward
- Young Company is beginning operations and is considering three alternatives to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity-based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected? a. All production costs approach those costs that were budgeted. b. The sales mix does not vary from the mix that was budgeted. c. All manufacturing overhead is a fixed cost. d. All ending inventory balances are zero.arrow_forwardFriendly Bank is attempting to determine the cost behavior of its small business lending operations. One of the major activities is the application activity. Two possible activity drivers have been mentioned: application hours (number of hours to complete the application) and number of applications. The bank controller has accumulated the following data for the setup activity: Required: 1. Estimate a regression equation with application hours as the activity driver and the only independent variable. If the bank forecasts 2,600 application hours for the next month, what will be the budgeted application cost? 2. Estimate a regression equation with number of applications as the activity driver and the only independent variable. If the bank forecasts 80 applications for the next month, what will be the budgeted application cost? 3. Which of the two regression equations do you think does a better job of predicting application costs? Explain. 4. Run a multiple regression to determine the cost equation using both activity drivers. What are the budgeted application costs for 2,600 application hours and 80 applications?arrow_forwardBumblebee Mobiles manufactures a line of cell phones. The management has identified the following overhead costs and related cost drivers for the coming year. The following were incurred in manufacturing two of their cell phones, Bubble and Burst, during the first quarter. REQUIREMENT Review the worksheet called ABC that follows these requirements. You have been asked to determine the cost of each product using an activity-based cost system. Note that the problem information is already entered into the Data Section of the ABC worksheet.arrow_forward
- Silven Company has identified the following overhead activities, costs, and activity drivers for the coming year: Silven produces two models of cell phones with the following expected activity demands: 1. Determine the total overhead assigned to each product using the four activity drivers. 2. Determine the total overhead assigned to each model using the two most expensive activities. The costs of the two relatively inexpensive activities are allocated to the two expensive activities in proportion to their costs. 3. Using ABC as the benchmark, calculate the percentage error and comment on the accuracy of the reduced system. Explain why this approach may be desirable.arrow_forwardA local picnic table manufacturer has budgeted the following overhead costs: They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown: Recent success has yielded an order for 1,500 tables. Determine how much the job would cost given the following activities, and assuming an hourly rate for direct labor of $25 per hour:arrow_forwardThe management of Wy Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company's controller has provided an example to illustrate how this new system would work. In this example, the allocation base ismachine-hours and the estimated amount of the allocation base for the upcoming year is 50,000 machine-hours. In addition, capacity is 59,000 machine-hours and the actual level of activity for the year is 53,300 machine-hours. All of the manufacturing overhead is fixed and is P1,622,500 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year. A number of products were worked on during the year, one of which was Product X. This product required 230 machine-hours. 21. If the company bases its predetermined overhead rate on the…arrow_forward
- For many years, Yotsuya Company has used a manufacturing overhead rate based on direct labor hours. A new plant accountant has suggested that the company may be able to assign overhead costs to products more accurately by using an activity-based costing system. The accountant explains that by creating an overhead rate for each production activity that causes overhead costs, the resulting product costs will reflect an accurate measure of overhead cost. The direct material cost is P120 per unit. The budgeted hours is 8,030 direct labor hours. The accountant has identified activity centers to which overhead costs are assigned. The cost pool amounts for theses centers and their selected activity drivers for 2019: Activity Centers Costs Activity Drivers Materials handling P60,000 1,200 times handled Scheduling and setups 80,000 400 setups Design section 10,750 100 changes No. of parts 50,000 500 parts P200,750 The company’s products…arrow_forwardThe management of Krach Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company's controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 23,000 machine-hours. Capacity is 27,000 machine-hours and the actual level of activity for the year is assumed to be 13,500 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $78,300 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year. If the company bases its predetermined overhead rate on capacity,…arrow_forwardFolsom Company manufactures specialty tools to customer order. There are three producingdepartments. Departmental information on budgeted overhead and various activity measuresfor the coming year is as follows: Currently, overhead is applied on the basis of machine hours using a plantwide rate.However, Janine, the controller, has been wondering whether it might be worthwhile to usedepartmental overhead rates. She has analyzed the overhead costs and drivers for the various departments and decided that Welding and Finishing should base their overhead rates on machinehours and that Assembly should base its overhead rate on direct labor hours.Janine has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 35% markup over full manufacturing cost. Round all overheadrates to the nearest cent. Round all bid prices to the nearest dollar.Required:1. Calculate a plantwide rate for Folsom Company based on machine hours. What is the bidprice of…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College