Question

1. Summer Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed as follows:
   

   Maintenance	$255,000
   Materials handling	125,000
   Setups	30,000
   Inspection	105,000

   
   Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 100,000 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 10 percent.
   
   Estimates for the proposed job are as follows:
   

   Direct materials	$15,000
   Direct labor (8,000 hours)	$12,000
   Number of material moves	100
   Number of inspections	120
   Number of setups	24
   Number of machine hours	4,000

   
   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	60,000
   Material moves	20,000
   Setups	3,000
   Quality inspections	12,000

   
   What is the total cost of the proposed job if Summer Manufacturing uses direct labor hours as its only activity driver?

   a. $53,200

   b. $72,000

   c. $56,200

   d. $68,200

Answer 1

Maintenance	$255,000
Materials handling	125,000
Setups	30,000
Inspection	105,000
Estimated Overheads	$515,000

Estimated direct labor hours = 100,000

Predetermined overhead rate =  Estimated Overheads/Estimated direct labor hours

= 515,000/100,000

= $5.15 per direct labor hour

Applied overhead = Actual direct labor hour x Predetermined overhead rate

= 8,000 x 5.15

= $41,200

Direct materials	$15,000
Direct labor (8,000 hours)	$12,000
Applied overhead	$41,200
Total Cost	$68,200

Correct option is d.

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