Question

Paperose Printing Enterprise (BPB) specializes in producing wedding invitation card and wedding announcements. The company is owned by Ms Dalina. Dalina uses an actual job-order costing system. An actual overhead rate is computed at the end of each month using actual direct labor hours and overhead for the month. Once the actual cost of a job is obtained, the customer is billed at actual cost plus 40 percent.

During February 2020, Mrs. Jamila, a good friend of owner of BPP ordered three sets of wedding announcements to be delivered February 10, March 10, and April 10, respectively. Dalina scheduled production for the orders on February 7, March 7, and April 7, respectively. The orders were assigned job numbers 131, 132, and 133, respectively.

Dalina assured Mrs. Jamila that she would attend each of her daughters' weddings. Out of sympathy and friendship, she also offered a lower price. Instead of cost plus 40 percent, she gave Mrs. Jamila a special price of cost plus 25 per­cent. Moreover, she decided to wait until the final wedding to bill for the three jobs.

On May 15, Dalina requested her accountant to provide her the completed job­order cost sheets for Jobs #131, #132, and #133. She also gave instructions to lower the price as had been agreed upon. The cost sheets revealed the following in­formation:

	Job #131	Job #132	Job #133
Cost of direct materials	RM1,000	RM1,000	RM1,200
Cost of direct labor (five hours)	100	100	100
Cost of overhead	800	1,600	1,600
Total cost	1,900	2,700	2,900
Total price	RM2,375	RM3,375	RM3,625
Number of announcements	2,000	2,000	2,000

Dalina could not comprehend why the overhead costs assigned to Jobs #132 and #323 were so much higher than those for Job #131. She requested for an overhead cost summary sheet for the months of February, March, and April, which showed that actual overhead costs were RM80,000 each month. She also discovered that direct labor hours applied to all jobs were 2,000 hours in February and 1,000 hours each in March and April.

Required

1. 1. In your opinion how Mrs. Jamila will feel when she receives the bill for the three sets of wedding announcements?
2. 2. Explain how the overhead costs were assigned to each job.
3. 3. Assume that BPB's average activity is 2,000 hours per month and that the company usually experiences overhead costs of RM960,000 each year. Can you recommend a better way to assign overhead costs to jobs? Recalculate the cost of each job and its price given your method of overhead cost assignment. Which method do you think is best? Why?

Answer 1

a. Mrs. Jamila is expected to feel surprised and confused when she receives the bill for the three sets of wedding announcements, since, for the same number of wedding announcements ( 2,000 ) each month, the prices are so different. The bill for 2,000 units in February is RM 2,375, increasing to RM 3,375 in March and to RM 3,625 in April.

b. It seems that the overhed costs were assigned by dividing the total monthly overhead by cost of direct labor in February. In March and April, since the number of direct labor hours dropped from 2,000 to 1,000, the allocation rate was simply doubled from $ 800 to $ 1,600.

c. Predetermined overhead rate = 960,000 / (2,000 x 12) = RM 40 per direct labor hour.

	Job # 131	Job # 132	Job # 133
Direct Materials	RM 1,000	RM 1,000	RM 1,200
Direct Labor	100	100	100
Overhead cost	200	200	200
Total cost	1,300	1,300	1,500
Margin	325	325	375
Total price	RM 1,625	RM 1,625	RM 1,875

The normal costing method is better, with overhead getting assigned to jobs on the basis of a predetermined overhead rate.