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 joborder 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
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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
a) In your opinion how Mrs. Jamila will feel when she receives the bill for the three sets of wedding announcements?

b) Explain how the overhead costs were assigned to each job.

c) 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) In your opinion how Mrs. Jamila will feel when she receives the bill for the three sets of wedding announcements?

Mrs. Jamila will feel confused and not happy with the pricing of each set of cards. Card 1 and 2 had same direct material and labour costs, so it can be assumed that they would look and feel similar. Mrs Jamila will be confused with the price differences.

b) Explain how the overhead costs were assigned to each job.

Overhead costs were applied on the basis of direct labours appplied during a month and not on basis if each direct labour for each job. Thus since more direct labours applied during February, lower the rate.

c) 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?

Overhead costs should be allocated based by a predetermined direct labour rate.

Annual average activity = 2,000 hrs x 12 = 24,000 hrs

Overhead costs per annum = RM960,000

So a overhead rate should be determined per hour as = RM960,000 / 24,000 hrs = $40 per direct labour hour.

Predetermined overhead rate is the best method for job costing. Because of accuracy in pricing.