Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $3,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.”

Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year:

	Department
	Fabricating		Machining		Assembly		Total Plant
Manufacturing overhead	$	381,500	$	436,000	$	98,100	$	915,600
Direct labor	$	218,000	$	109,000	$	327,000	$	654,000

Jobs require varying amounts of work in the three departments. The Koopers job, for example, would have required manufacturing costs in the three departments as follows:

	Department
	Fabricating			Machining			Assembly			Total Plant
Direct materials	$	4,800		$	500		$	3,200		$	8,500
Direct labor	$	6,400		$	800		$	8,000		$	15,200
Manufacturing overhead		?			?			?			?

Required:

1. Using the company's plantwide approach:

a. Compute the plantwide predetermined rate for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.

2. Suppose that instead of using a plantwide predetermined overhead rate, the company had used departmental predetermined overhead rates based on direct labor cost. Under these conditions:

a. Compute the predetermined overhead rate for each department for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.

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 Koopers job using a plantwide predetermined overhead rate?

b. What would the bid price have been if departmental predetermined overhead rates had been used to apply overhead cost?

Answer 1

1a)	predetermined overhead rate
	total manufacturing cost/total direct labor
	915600/654000
	140%
b)	overhead applied
	15200*140%
	21280
2a)				Fabricating	Machining	Assembly
	manufacturing overhead			381,500	436,000	98,100	915,600
	direct labor			218,000	109,000	327,000	654,000
	overhead rate			175%	400%	30%
2b)				Fabricating	Machining	Assembly
	direct labor			6,400	800	8,000	15,200
	overhead rate			175%	400%	30%
	manufacturing overhead applied			11200	3200	2400	16800	answer
4a)	total manufacturing cost
	direct materials					8,500
	direct labor					15,200
	overhead applied					21280
	total manufacturing cost					44,980
		Bid price = 44980*150%
			67470	answer
b)	dpartmental overhead rate when used
				Fabricating	Machining	Assembly	total
	direct materials			4,800	500	3,200	8,500
	direct labor			6,400	800	8,000	15,200
	overhead applied			11200	3200	2400	16800
	total cost			22,400	4500	13,600	40,500
	Bid price =40500*150%
		60750	answer