Firenza Company manufactures specialty tools to customer order. Budgeted overhead for thecoming year is: Purchasing $40,000Setups 37,500Engineering 45,000Other 40,000 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 read-ing 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 ordersfor 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 set-ups, and 2,500 engineering hours. Sanjay has been asked to prepare bids for two jobs with the following information: Job 1 Job 2Direct materials $4,500 $9,340Direct labor $1,200 $2,100Number of purchase orders 15 20Number of setups 3 4Number of engineering hours 45 10Number of machine hours 200 200 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 bidprice of each job using this rate?2. Calculate activity rates for the four overhead activities. What is the bid price of each jobusing these rates?3. Which bids are more accurate? Why?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Firenza Company manufactures specialty tools to customer order. Budgeted
coming year is:
Purchasing $40,000
Setups 37,500
Engineering 45,000
Other 40,000
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 read-
ing 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 set-
ups, and 2,500 engineering hours.
Sanjay has been asked to prepare bids for two jobs with the following information:
Job 1 Job 2
Direct materials $4,500 $9,340
Direct labor $1,200 $2,100
Number of purchase orders 15 20
Number of setups 3 4
Number of engineering hours 45 10
Number of machine hours 200 200
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?
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