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Milton Manufacturing Overhead Activity Based Costing

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Milton Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows:
Maintenance $70,000
Materials handling 30,000
Setups 25,000
Inspection 50,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 50,000 direct labor hours are budgeted for next year.

The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually, bids are based upon full manufacturing cost plus 30 percent.
Estimates for the proposed job are as follows:
Direct materials $2,500
Direct labor (750 hours) $3,750
Number of machine hours 300
Number of material moves 8
Number of setups 3
Number of inspections 5
In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based activity driver, direct labor hours. The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.
Expected activity for the four activity drivers that would be used are:
Machine hours 16,000
Material moves 4,000
Setups 2,000
Quality inspections 8,000
Required:
a.Determine the amount of overhead that would be allocated to the proposed job if direct labor hours are used as the volume-based activity driver.
b.Determine the total cost of the proposed job.
c.Determine the company's bid if the bid is based upon full manufacturing cost plus 30 percent.
d.Determine the amount of overhead that would be applied to the proposed project if activity-based costing is used.
e.Determine the total cost of the proposed job if activity-based costing is used.
f.Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent.
g.Which product costing method produces the more competitive bid? Explain (in detail) the differences between how activity based costing systems can provide more accurate product costs than traditional cost systems.

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Solution Summary

See computations in excel attached. Click in cells to see calculations.

The activity costing produces a more competitive bid because it allocated less overhead. Why? Because it allocated based on what the job used in overhead resources (inspections, moves, setups, and machine time) rather than based on the proportion of labor hours compared to other jobs. This is more accurate because it reflects the actual overhead resources consumed by the job (rather than the direct costs consumed).

Solution Preview

See computations in excel attached. Click in cells to see calculations.

The activity costing produces a more ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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