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?

Firenza Company manufactures specialty tools to customer order. Budgeted overhead for the
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?