Question

Darius, marketing manager for Wankada Inc., was puzzled by the outcome of two recent bids to contract works. The company's policy was to bid 150% of the full manufacturing cost. One job (Job 100) had been turned down by a prospective customer, who had indicated that the proposed biding price of Wankada was $3 per unit higher than the winning bid. However, a second job (Job 101) had been accepted by a customer, who was agreeably amazed that Wankada could offer such favorable biding terms. This customer revealed that Wankada's price was $43 per unit lower than the next lowest bid.

Darius has been informed that the company was more than completive in terms of cost control.

Accordingly, he began to suspect that the problem was related to cost assignment procedures. Upon further investigating, Darius was told that the company uses a planwide (single) overhead rate based on direct labor hours. That rate is computed at the beginning of the year using budgeted data below.

	Department A	Department B	Total
Overhead Costs	$500,000	$2000,000	$2500,000
Direct Labor Hours	200,000	50,000	250,000
Machine Hours	20,000	120,000	140,000

Darius was also told that the overhead costs in Department B were higher than those in Department A because Department B has more equipment, higher maintenance, higher power consumption, higher depreciation, and higher setup costs. In addition to the general procedures for assigning overhead costs, Darius was supplied with the following specific actual manufacturing data on Job 100 and Job 101:

Job 100

	Department A	Department B	Total
Prime Costs	$100,000	$20,000	$120,000
Direct Labor Hours	5,000	1,000	6,000
Machine Hours	200	500	700
Units produced	14,400	14,400	14,400

Job 101

	Department A	Department B	Total
Prime Costs	$10,000	$40,000	$50,000
Direct Labor Hours	400	600	1,000
Machine Hours	200	3,000	3,200
Units produced	1,500	1,500	1,500

Required Questions:

1- Using a plan wide (single) overhead rate based on direct labor hours, develop the bid prices for Job 100 and Job 101 (express the bid prices on a per unit basis).

2- Using departmental overhead rates (use direct labor hours for Department A and machine hours for Department B), develop per unit bid prices for Job 100 and Job 101.

3- Compute the difference in gross profit that would have been earned had Alpha used departmental·rates in its bids instead of the plan wide (in which case both jobs would have been accepted) rate.

Fully Explain Please!

4- Explain why the use of departmental rates in this case provides a more accurate.product cost.

Answer 1

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Part -1
Total Overhead	A	$       2,500,000
Total Direct Labor Hours	B	250,000
Plant-wise Overhead Rate	A/B	$                      10
		Job 100	Job 101
Prime Cost (Material and Labor)		$           120,000	$            50,000
Overheads:
-Job 100	6000*10	$             60,000
-Job 101	1000*10		$            10,000
Total Manufacturing Cost		$           180,000	$            60,000
Bidding Price 150%	C	$           270,000	$            90,000
Units Produced	D	14,400	1,500
Per unit Bidding Price	C/D	$                18.75	$              60.00
Part -2
		Departmetn A	Departmetn B
Total Overhead	A	$           500,000	$      2,000,000
Direct Labor Hours	B	200,000
Machine Hour	C		120,000
Department Wise Overhead Rate	A/B	$                  2.50
	A/C		$              16.67
		Job 100	Job 101
Prime Cost (Material and Labor)		$           120,000	$            50,000
Overheads:
Department A	5000*2.5 & 400*2.5	$             12,500	$              1,000
Department B	500*16.67 & 3000*16.67	$                8,333	$            50,000
Total Manufacturing Cost		$           140,833	$          101,000
Bidding Price 150%	C	$           211,250	$          151,500
Units Produced	D	14,400	1,500
Per unit Bidding Price	C/D	$                14.67	$            101.00
Part -3
Plant Wide Rate: Bid for Job 101 was accepted. So Profit is:
Bidding Price/Selling Price	60*1500	$             90,000
Less: Total Manufacturing Cost		$             60,000
Gross Profit		$             30,000
Department Wise:
		Job 100	Job 101	Total
Bidding Price/Selling Price		$           211,250	$          151,500	$ 362,750
Less: Total Manufacturing Cost		$           140,833	$          101,000	$ 241,833
Gross Profit		$             70,417	$            50,500	$ 120,917
Difference	120917-30000	$             90,917
Part -4
Departmental rate provies more accurate product cost because of different concentration of Machin hour and labor hour in both the departments.