ABC company has been incurring two types of overhead costs-material handling and quality inspection. The costs expected for these categories for the coming year are as follows:
Material handling Rs. 10,00,000
Quality inspection Rs. 30,00,000
The company currently charges overhead using direct labour hours and expected actual capacity. This figure is 50,000 direct labour hours. The factory manager has been asked to submit a bid and has assembled the following data concerning proposed job.
The manager has been informed that many competitors use an ABC approach to assign overhead to jobs. Before, submitting his bid for the proposed job, he wants to assess the effects of this alternative approach. He estimates that the expected number of material moves for all jobs during the year is 1,000. He also expects 5000 quality inspections to be performed.
(a) Compute the total cost of the proposed job using direct labour hours to assign overhead. Assume the bid price is full manufacturing cost plus 25%, what would be the managers bid?
(b) Compute the total cost of the job using the number of material moves to allocate material-handling costs and the number of inspections to allocate the quality inspections costs. Assume bid price is full manufacturing costs plus 25%. What should be his bid using this approach?
(c) Which approach do you think best reflects the actual cost of the job. Explain.
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