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MMC Ltd. produces machine parts on a job-order basis. Majority of the business contracts are obtained through bidding. Business firms competing with MMC Ltd. bid...

MMC Ltd. produces machine parts on a job-order basis. Majority of the business contracts are obtained through bidding. Business firms competing with MMC Ltd. bid full cost plus 20 per cent mark up. Recently, with the expectation of increase in sales, MMC Ltd. reduced its mark up from 25 per cent to 20 per cent.
The company operates two support departments and two production departments. The budgeted costs and the normal activity levels for each department are given below:

Additional information:
1. The direct costs of the maintenance department are allocated on the basis of employees while
those of power department are allocated on the basis of maintenance hours.
2. Departmental overhead rates are used to assign costs to products. Grinding department uses
machine hours and assembly department uses labour hours.
MMC Ltd. is preparing to bid for a contract, job K, that requires three machine hours per unit
produced in grinding and zero hours in assembly department. The expected prime costs per unit are Shs. 670.

Required:
a) Allocate the support service costs to the production departments using the direct allocation method
b) What will be the bid for job K if the direct allocation method is used?
c) Allocate the service costs to the production departments using the sequential allocation method
d) What will be the bid for job K if the sequential allocation method is used?
e) Briefly explain the problems encountered in setting overhead cost standards.
f) Distinguish between cost allocation and cost apportionment.