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 $9,900 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	$	308,000			$	210,000			$	381,000			$	899,000
Manufacturing overhead	$	539,000			$	823,390			$	85,000			$	1,447,390

    
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	$	12,100			$	900			$	5,600			$	18,600
Direct labor	$	6,400			$	1,800			$	13,000			$	21,200
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.)

Answer 1

1 (a) predetermined overhead rate can be calculated as:

Predetermined overhead rate = estimated total manufacturing overhead cost / estimted total amount of the allocation base

= $ 1,447,390 / 899,000

= 161 %

1 (b) The mount of overhead applied to the job will be determined by the predetermined overhead rate and direct labour hours.

= $ 21,200 * 161%

= $ 34,132

2 (a) To calculate the predetermined overhead rate for each department divide the estimated manufacturing overhead cost by the estimated direct labour cost in each department

	Cutting	Machining	Assembly
Estimated manufacturing overhead cost (a)	539,000	823,390	85,000
Estimated direct labour cost (b)	308,000	210,000	381,000
Predetermined overhead rate[ (a)/(b) ]	175%	392%	22%

2 (b) The amount of overhead applied to the job will be determined by the predetermined overhead rate and direct labour hpurs for each department

Cutting = $6,400 * 175%

= $11,375

Machining = $ 1,800 * 392%

= $ 7,056

Assembly = $ 13,000 * 22%

= $2,860

The sum of overhead applied in all departments is:

= $11,375 + $ 7,056 + $ 2,860

= $ 21,291

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