Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $2,000. 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	$	358,750	$	410,000	$	92,250	$	861,000
Direct labor	$	205,000	$	102,500	$	307,500	$	615,000

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	$	3,500		$	200		$	1,900		$	5,600
Direct labor	$	3,800		$	500		$	6,700		$	11,000
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

1a)	predetermined overhead rate
	total manufacturing cost/total direct labor
	861000/615000
	140%
b)	overhead applied
	11000*140%
	15400
2a)				Fabricating	Machining	Assembly
	manufacturing overhead			358,750	410000	92,250	861,000
	direct labor			205,000	102500	307,500	615,000
	overhead rate			175%	400%	30%
2b)				Fabricating	Machining	Assembly
	direct labor			3,800	500	6,700	11,000
	overhead rate			175%	400%	30%
	manufacturing overhead applied			6650	2000	2010
4a)	total manufacturing cost
	direct materials					5,600
	direct labor					11,000
	overhead applied					15400
	total manufacturing cost					32,000
		Bid price = 32000*150%
			48000
b)	dpartmental overhead rate when used
				Fabricating	Machining	Assembly	total
	direct materials			3,500	200	1,900	5,600
	direct labor			3,800	500	6,700	11,000
	overhead applied			6650	2000	2010	10660
	total cost			13,950	2700	10,610	27,260
	Bid price =27260*150%
		40890