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Stanford Industries currently uses a normal job-costing system with a single overhead cost pool. It supplies parts to the aeronautic industry and, as a result, quality control is paramount. It currently applies the indirect costs of quality control on the basis of direct labour cost at a rate of 150%. Most of the company’s work is awarded by bidding on cost-plus contracts. Recently, Stanford has come under increasing pressure to justify its costs. It is concerned that its single allocation rate may be distorting some of its product bids. In an analysis of its quality-control costs, it has determined that there are four activities, and it has determined the following cost drivers and rates based on annual projections: Stanford has decided to review one of its recently completed contracts. Direct labour on the job was $467,000 and the direct materials cost was $392,000. A review of the job’s activities showed that: ■ 50 different types of parts were used. ■ A total of 40,000 units were produced. ■ 30% of all units produced were inspected upon completion. Required 1. Calculate the amount of overhead that would be allocated to the contract: a. Using the current costing system that allocates overhead on the basis of direct labour cost. b. Using an ABC system. 2. Do you recommend a switch to ABC? Why or why not?
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