Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 35

Overhead Application, Activity-Based Costing, Bid Prices
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 manufacturing cost.
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?