Cost Accounting: Evaluating Bidding, Allocation, and Costing Methods

This assignment delves into various cost accounting methods, focusing on overhead allocation and bidding strategies. It begins by addressing a company's issue with inconsistent bid wins by proposing a department-wide overhead allocation rate based on bending and welding hours, contrasting it with the organization-wide single overhead rate. The analysis extends to calculating per-unit costs using traditional and activity-based costing (ABC) methods, providing a comparative view. Furthermore, the assignment evaluates different service department allocation methods—direct, step-down, and reciprocal—to optimize cost distribution. Break-even sales volume and target sales calculations are performed, alongside an assessment of a special offer's profitability. Finally, the assignment explores joint cost allocation using physical units, net realizable value, and constant gross margin percentage methods. Desklib is a platform where students can find similar assignments and study resources to enhance their understanding.

Part A
In the present case, William Ltd is having two production departments i.e. Welding and Bending.
The company is facing the issue that some job’s bids of the company which are having higher
welding labor hours are won by the organization and other job’s bids which having higher
bending labor hours is lost by the organization.
This issue is arising because the company is using a single overhead rate for the company as a
whole i.e. total overhead of the organization is divided by the total hours of the work in the
organization. The organization is calculation bid for every job in the following way,
Belding department Overhead $ 54,000.00
Welding department overhead $ 144,000.00
Total overhead $ 198,000.00
Total overhead $ 198,000.00
÷ Total hours (3000+3000)*12 72000
Overhead rate per hour $ 2.75
Overhead rate per hour $ 2.75
× Hours in every bid 1500
The overhead cost of the bid $ 4,125.00
Part B
Question 1
a. In the present case, the organization is bidding he overhead rate on the basis of the
organization wide single overhead rate. This results in the issue that all bids in which
welding hours are higher are lost by the organization. As a corrective action organization
could overcome this issue by applying a department wide overhead allocation rate. In this
system, the organization needs to divide the bending department’s overhead by hour of
bending department and divide the welding department’s overhead by hour of welding
department. Under this scheme, the overhead rate will be calculated in this way,
Particulars Bending department Welding Department
Overhead $ 54,000.00 $ 144,000
Total hours 3000 * 12= 36000 hours 3000 * 12= 36000 hours
Overhead rate per hour $ 54,000 / 36000= $ 1.50 $ 144,000 / 36000= $ 4.00

After the implication of this department wide bidding scheme, the total overhead cost for each
bid will be as follows,
Job Belding department Overhead Welding department Overhead Total overhead cost
1 $ 1.5* 1200 hours = $ 1,800.00 $ 4* 300 hours = $ 1,200.00 $ 3,000.00
2 $ 1.5* 300 hours = $ 450.00 $ 4* 1200 hours = $ 4,800.00 $ 5,250.00
3 $ 1.5* 1400 hours = $ 2,100.00 $ 4* 100 hours = $ 400.00 $ 2,500.00
4 $ 1.5* 100 hours = $ 150.00 $ 4* 1400 hours = $ 5,600.00 $ 5,750.00
5 $ 1.5* 7500 hours = $ 1,125.00 $ 4* 750 hours = $ 3,000.00 $ 4,125.00
b. This bidding scheme will reduce the number of lost bids and in turn, will result in help
for the organization. It seems that some qualitative factors in jobs require higher time in
the bending department are less costly then jobs require higher time in welding
department hence the customers of job in which bending department’s work is higher are
not willing to pay higher amount and in turn jobs bid having longer hours in bending
department bid are lost by the organization. Hence, due to some qualitative factors, this
bidding scheme will be helpful.
In addition to this it is clear that qualitative factors in jobs require higher time in the
welding department are more costly then jobs require higher time in bending department
hence the customers of job in which the welding department’s work is higher are willing
to pay a higher amount and in turn jobs bid having longer hours in the welding
department are win by organization. Hence it can be concluded that per hour overhead
cost is higher in welding department; hence the cost of bids consuming longer time in
welding department should be higher in comparison of the bids consuming longer time in
bending department. Therefore this scheme is helpful in winning of more bids as well as
getting higher profits.
Question 2
a. Calculation of per unit cost
Basic Superior
Direct material cost $ 25.00 $ 60.00
Direct labor cost $ 39.00 $ 52.00
Overhead cost $ 120.00 $ 160.00
Total cost per unit $ 184.00 $ 272.00
Working note: Calculation of overhead allocation rate
Total overhead $ 1,504,000.00
Total direct labor hours 37600

Overhead cost per hour $ 40.00
b. Calculation of per unit cost
Basic Superior
Direct material cost $ 25.00 $ 60.00
Direct labor cost $ 39.00 $ 52.00
Manufacturing overhead cost $ 134.38 $ 148.10
Total cost per unit $ 198.38 $ 260.10
Working note: Calculation of cost driver rate
Overhead Activity Cost Cost Driver Cost driver rate
Order processing $ 240,000.00 Number of order processed 800 $ 300.00
Machine processing $ 1,124,000.00 Number of machine hours 56200 $ 20.00
Product inspection $ 140,000.00 Number of inspection hours 10000 $ 14.00
Calculation of overhead cost per unit
Basic Superior
Order processing $ 153,000.00 $ 87,000.00
Machine processing $ 436,000.00 $ 688,000.00
Product inspection $ 56,000.00 $ 84,000.00
Total manufacturing cost $ 645,000.00 $ 859,000.00
Number of units produced 4,800 5,800
Overhead cost per unit $ 134.38 $ 148.10
Question 3
a. Direct method
direct Services department Production Departments
Human resource Computing Deposit Loan
Costs prior to allocation $ 180,000 $ 238,000
Allocation of Human resource cost 60% 30%
Percentage 66.7% 33.3%
Allocation of cost $ (180,000) $ 120,000 $ 60,000
Allocation of computing cost 50% 35%
Percentage 59% 41%
Allocation of cost $ (238,000) $ 140,000 $ 98,000

Total $ - $ - $ 260,000 $ 158,000
b. Step-down method
Services department Production Departments
Human resource Computing Deposit Loan
Costs prior to allocation $ 180,000 $ 238,000
Allocation of Human resource cost 10% 60% 30%
Percentage 10.00% 60.00% 30.00%
Allocation of cost $ (180,000) $ 18,000 $ 108,000 $ 54,000
Allocation of computing cost 50% 35%
Percentage 59% 41%
Allocation of cost $ (256,000) $ 150,588 $ 105,412
Total $ - $ - $ 258,588 $ 159,412
c. Reciprocal service method
Services department Production Departments
Human resource Computing Deposit Loan
Costs prior to allocation $ 180,000 $ 238,000
Allocation of Human resource 10.00% 60.00% 30.00%
Allocation of cost (see note) $ (218,984.77) $ 21,898.48 $ 131,390.86 $ 65,69.43
Sub-Total $ (38,984.77) $259,898.48 $ 131,390.86 $ 65,695.43
Allocation of Computing 15.00% 50.00% 35.00%
Allocation of cost $ 38,984.77
$(259,898.48
) $ 129,949.24 $ 90,964.47
Total $ - $ - $ 261,340.10 $156,659.90
Let Human resource department= H and computing department =C
Then, H=180000+15% of C and C=238000+10% of H
H=180000+15% of C
H=180000+15%*(238000+10%* H)
H=215700+0.015H
H=218984.77, C= 259898.48
Question 4
a. Unit contribution margin

Eight Seater Six Seater
Sales $ 4,000.00 $ 3,000.00
Less: Variable Cost $ 400.00 $ 300.00
Contribution per unit $ 3,600.00 $ 2,700.00
b. Sales Mix
Three quarters sales are belongs to Six Seater then remaining i.e. one quarter sales belongs to
Eight Seater. Hence sales mix is,
Eight Seater = 25%
Six Seater = 75%
c. Weighted average unit contribution
Eight seater Six seater
Contribution per unit $ 3,600.00 $ 2,700.00
Sales mix 25% 75%
Weighted contribution margin $ 900 $ 2025
Weighted average unit contribution margin $ 2,925.00
d. Break even sales volume
Fixed cost $ 398,400.00
Contribution margin $ 2,925.00
Break even sales unit 136.21
Break even sales unit each type
Eight seater = 136.21*25%*4000 = $ 136,205.13
Six seater = 136.21*75%*3000 =$ 275,815.38
e. Bicycles units for desired net profit
Target net profit $ 504,700.00
Fixed cost $ 398,400.00
Desired contribution $ 903,100.00
weighted average unit contribution margin $ 2,925.00
Sales unit 308.75
Sales unit each type
Eight seater = 308.75*25%*4000 = $ 308,752.14
Six seater = 308.75*75%*3000 =$ 694,692.31

Question 5
Part A
Calculation of variable manufacturing overhead per unit
Fixed manufacturing overhead $ 750,000.00
Machine hours 60000
Fixed manufacturing overhead per hour $ 12.50
Fixed manufacturing overhead per unit $ 6.25
Total manufacturing overhead per unit $ 10.00
Fixed manufacturing overhead per unit $ 6.25
Variable manufacturing overhead per unit $ 3.75
Calculation of total cost of offer’s production
Per unit Total
Direct material $ 6.10 $ 67,100.00
Direct Labor $ 2.25 $ 24,750.00
Variable Manufacturing Overhead $ 3.75 $ 41,250.00
Set up cost $ 3,700.00
Special device $ 2,400.00
Total cost $ 139,200.00
Calculation of net gain from offer
Per unit Total
Sale $ 26.50 $ 291,500.00
Total cost $ 139,200.00
Net gain $ 152,300.00
Company should accept the offer because acceptance of this offer will result in net gain of
$152300 to organization.
Part B
a. Physical Units Method
Product: Alpha Beta Total
Units 24000 16,000 40,000

Allocation % 60% 40%
Joint cost (% × $240,000) allocated $ 144,000.00 $ 96,000.00 $240,000.00
b. Net Realizable Value Method
Product: Alpha Beta Total
Units 24000 16,000 40,000
Unit price $ 12.00 $ 15.00
Total revenue $ 288,000.00 $ 240,000.00 $528,000.00
Allocation % 54.55% 45.45%
Joint cost (% × $240,000) allocated $ 130,909.09 $ 109,090.91 $ 240,000.00
c. Constant Gross Margin Percentage Method
Product: Alpha Beta Total
Units 24,000 16,000
Unit price $ 12.00 $ 15.00
Revenue $ 288,000.00 $ 240,000.00 $528,000.00
Joint Less: processing cost $240,000.00
Gross margin $288,000.00
Gross margin ratio $288,000 / $3,700,000 = 54.55%
Joint Cost Allocation
Revenue $288,000.00 $240,000.00 $528,000.00
Gross Less: margin at 20% $157,090.91 $130,909.09
Joint cost allocated $130,909.09 $109,090.91 $240,000.00