Question

"Don't tell me we've lost another bid!" exclaimed Sandy Kovallas, president of Lenko Products, Inc. "I'm afraid so," replied Doug Martin, the operations vice president. "One of our competitors underbid us by about $10,100 on the Hastings job." "I just can’t figure it out," said Kovallas. "It seems we’re either too high to get the job or too low to make any money on half the jobs we bid anymore. What’s happened?" Lenko Products manufactures specialized goods to customers' specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made at the beginning of the year: Department Cutting Machining Assembly Total Plant Direct labor $ 311,000 $ 209,000 $ 405,000 $ 925,000 Manufacturing overhead $ 525,000 $ 871,000 $ 84,000 $ 1,480,000 Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows: Department Cutting Machining Assembly Total Plant Direct materials $ 12,000 $ 800 $ 5,500 $ 18,300 Direct labor $ 6,500 $ 1,800 $ 13,000 $ 21,300 Manufacturing overhead ? ? ? ? The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. Required: 1. Assuming the use of a plantwide overhead rate: a. Compute the rate for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. 2. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions: a.Compute the rate for each department for the current year.(Round predetermined overhead percentages to the nearest whole percent.) b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. (Round your predetermined overhead percentages to the nearest whole percent.) 4. Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labor, and applied overhead). a. What was the company's bid price on the Hastings job if the plantwide overhead rate had been used to apply overhead cost? b.What would the bid price have been if departmental overhead rates had been used to apply overhead cost? 5. At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year: Department Cutting Machining Assembly Total Plant Direct materials $ 759,000 $ 90,000 $ 410,000 $ 1,259,000 Direct labor $ 317,000 $ 210,000 $ 339,000 $ 866,000 Manufacturing overhead $ 561,000 $ 830,000 $ 91,000 $ 1,482,000 a. Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used. b. Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used.

Answer 1

1
a.	Plant wide overhead rate=Estimated Manufacturing overhead/Estimated direct labor=1480000/925000=1.6=160% of direct labor cost
b.	Amount of manufacturing overhead applied to Hastings job=Direct labor cost*160%=21300*160%=$ 34080
2
a.	Departmental overhead rate=Estimated Manufacturing overhead of the department/Estimated direct labor cost of the department
					Cutting	Machining	Assembly
	Estimated manufacturing overhead (1)				525000	871000	84000
	Estimated direct labor cost			2	311000	209000	405000
	Departmental overhead rate			(1)/(2)	1.69	4.17	0.21
					169%	417%	21%
b.	Amount of manufacturing overhead applied to Hastings job=Direct labor cost of department*Departmental overhead rate
					Cutting	Machining	Assembly
	Estimated direct labor cost			1	6500	1800	13000
	Departmental overhead rate			2	169%	417%	21%
	Manufacturing overhead applied			(1*2)	10985	7506	2730
4
a.	Bid price:
					$
	Total direct material cost				18300
	Total direct labor cost				21300
	Manufacturing overhead applied (Refer 1-b.)				34080
	Total manufacturing cost				73680
	Bid price=150%*Total manufacturing cost=73680*150%=$ 110520
b.	Bid price:
					Cutting	Machining	Assembly	Total
	Direct material cost				12000	800	5500	18300
	Direct labor cost				6500	1800	13000	21300
	Manufacturing overhead applied (Refer 2-b.)				10985	7506	2730	39600
	Total manufacturing cost							79200
	Bid price=150%*Total manufacturing cost=79200*150%=$ 118800
5
a.	Applied overhead > Actual overhead= Over applied overhead
	Applied overhead < Actual overhead= Under applied overhead
					$
	Total actual manufacturing overhead				1482000
	Applied manufacturing overhead				1385600
	(160% of direct labor cost)				(866000*160%)
	Underapplied overhead				96400
b.					Cutting	Machining	Assembly	Total
	Actual manufacturing overhead				561000	830000	91000	1482000
	Estimated direct labor cost			1	317000	210000	339000
	Departmental overhead rate			2	169%	417%	21%
	Manufacturing overhead applied			(1*2)	535730	875700	71190	1482620
	Under/(over) applied overhead				25270	-45700	19810	-620