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	$	360,500	$	412,000	$	92,700	$	865,200
Direct labor	$	206,000	$	103,000	$	309,000	$	618,000

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	$	3,600		$	300		$	2,000		$	5,900
Direct labor	$	4,000		$	600		$	6,800		$	11,400
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

Part 1 - Manufacturing overhead cost using plant wide overhead rate

(a) Plant wide overhead rate - Budgeted Overhead/Estimated amount of total allocation base

=$ 865200 / $ 618000

=$1.4 per direct labour

(b) Manufacturing cost to be applied to koopers job

= Plantwide overhead rate * Actual use of the allocation base i.e.direct labour

=$ 1.4 * $ 11,400

=$15960

Part 2 - Manufacturing overhead cost using predetermined overhead rate of each department

(a) Calculation of predetermined departmental overhead rate

Particulars	Fabricating	Machining	Assembly
Manufacturing overhead (A)	$360500	$412000	$92700
Direct Labour (B)	$206000	$103000	$309000
Predetermined overhead rate (A/B)	$1.75	$4	$0.3

(b) Calculation of Manufacturing overhead to be applied to each department

Applied manufacturing overhead = Predetermined overhead rate * Actual use of allocation base i.e. direct labour

labour

Particulars	Amount
Fabricating ($1.75*4000)	$7000
Machining ($4*600)	$2400
Assembly ($0.3*6800)	$2040
Total	$11440

Analysis - there is difference in the amount of manufacturing overhead cost applied using departmentak rates and plant wide rates. This is because the departmental rates allocate the overhead more accurately than plant wide lump sum allocation.

Part 4(a) and 4(b) - Calculation of bid price

Bid Price = Total manufacturing cost * 150% (given)

Particulars	Using Plant wide rate	Using predetermined Departmental rates
Direct Material	$5900	$5900
Direct labour	$11400	$11400
Manufacturing overhead	$15960	$11440
Total Manufacturing cost	$33260	$28740
Bid rate	150%	150%
Total Bid Price	$49890 ($33260*150%)	$43110 ($28740*150%)

Difference in bid price if predetermined departmental rates are used = ($49890 - $43110) = 6780