Question

Problem 2-16 Plantwide Predetermined Overhead Rates; Pricing [LO2-1, LO2-2, LO2-3]

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates:

Direct labor-hours required to support estimated production		90,000
Machine-hours required to support estimated production		45,000
Fixed manufacturing overhead cost	$	252,000
Variable manufacturing overhead cost per direct labor-hour	$	2.40
Variable manufacturing overhead cost per machine-hour	$	4.80

During the year, Job 550 was started and completed. The following information is available with respect to this job:

Direct materials	$	236
Direct labor cost	$	371
Direct labor-hours		15
Machine-hours		5

Required:

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

2. Assume that Landen’s controller believes that machine-hours is a better allocation base than direct labor-hours. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

(Round your intermediate calculations to 2 decimal places. Round your "Predetermined Overhead Rate" answers to 2 decimal places and all other answers to the nearest whole dollar.)

Problem 2-18 Job-Order Costing for a Service Company [LO2-1, LO2-2, LO2-3]

Speedy Auto Repairs uses a job-order costing system. The company’s direct materials consist of replacement parts installed in customer vehicles, and its direct labor consists of the mechanics’ hourly wages. Speedy’s overhead costs include various items, such as the shop manager’s salary, depreciation of equipment, utilities, insurance, and magazine subscriptions and refreshments for the waiting room.

The company applies all of its overhead costs to jobs based on direct labor-hours. At the beginning of the year, it made the following estimates:

Direct labor-hours required to support estimated output		42,000
Fixed overhead cost	$	693,000
Variable overhead cost per direct labor-hour	$	1.00

Required:

1. Compute the predetermined overhead rate.

2. During the year, Mr. Wilkes brought in his vehicle to replace his brakes, spark plugs, and tires. The following information was available with respect to his job:

Direct materials	$	660
Direct labor cost	$	175
Direct labor-hours used		10

Compute Mr. Wilkes’ total job cost.

3. If Speedy establishes its selling prices using a markup percentage of 60% of its total job cost, then how much would it have charged Mr. Wilkes?

Answer 1

SOLUTION

Problem 2-16

1A. Plantwide predetermined overhead rate-

Variable overhead rate per hour = $2.40

Fixed overhead rate per hour = $252,000 / 90,000 = $2.80

Predetermined overhead rate = $2.40 + $2.80 = $5.20

1B. Total manufacturing cost-

Particulars	Amount ($)
Materials	236
Labor	371
Manufacturing overhead (15 hours * $5.20)	78
Total	685

1C. Selling price = Manufacturing cost + 200% of manufacturing cost

= $685 + (200% * $685)

= $685 + $1,370 = $2,055

2A. Plantwide predetermined overhead rate-

Variable overhead rate per hour = $4.80

Fixed overhead rate per hour = $252,000 / 45,000 = $5.60

Predetermined overhead rate = $4.80 + $5.60 = $10.40

2B. Total manufacturing cost-

Particulars	Amount ($)
Materials	236
Labor	371
Manufacturing overhead (5 hours * $10.40)	52
Total	659

2C. Selling price = Manufacturing cost + 200% of manufacturing cost

= $659 + (200% * $659)

= $659 + $1,318 = $1,977