INTRODUCTION AND RATIONALE

The aim of this assignment is to help students further develop a number of the skills and knowledge required and valued by the accountancy profession. The task that students are required to undertake is similar to the tasks required of a professional accountant working within the management accounting field.

King 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

At present, 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 getting this job will result in new business in future years. Generally, 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 computed by allocating overhead using a volume-based driver like 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 will be used are:

Machine hours                16,000
Material moves                 4,000
Setups                            2,000
Quality inspections            8,000

Required:

A. Find out the company's bid if direct labor hours are used as the volume-based driver and the bid is based upon full manufacturing cost plus 30 percent.

B. Find out the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent.

C. Which product costing method produces the more competitive bid? And why?

The Knapp Company requires to predict the labor cost in producing small carrot patch dolls. The following production information is available:

Year    Dolls Produced    Labor Hours    Labor Dollars
2005    1,150                    850              $17,000
2006    1,600                    975               23,400
2007    1,100                    800               25,600
2008    2,100                   1,150             36,800
2009    1,500                    950               34,200
2010    1,300                    875                35,000

The technology has not changed since 2005. Wage rates have steadily increased since 2005; though, management expects no further wage increases in 2011.

Required:

A. Choose the suitable independent variable for predicting labor cost. Describe the reason for your selection.

B. Develop an equation to predict for 2011 the labor cost of producing carrot patch dolls. Use the high-low method.

C. Estimate the labor cost of producing 3000 carrot patch dolls for 2011 if 3,000 dolls are expected to produce.