In: Accounting
Azure has a job order and the following data have been recorded on its job cost sheet:
Direct material $50,000
Direct labour hours 1,000
Direct labour wage rate $25
Machine hours 750 hours
Number of units completed 800
The company applies manufacturing overhead on the basis of machine hours and the predetermined overhead rate is $20 per machine hour. Management is now considering whether this job order is profitable or not and how does this job order fare compared to the industry benchmark.
Required
A) Unit product cost will be calculated as the total cost devided by the total units.
Here, total cost will include the material cost + Labour cost + Overhead.
Labour cost = Labour hours * Direct labour wage rate
Labour cost = 1000 * $25
Labour cost = $ 25000.
Overhead = Predetermined overhead rate * Machine hours
Overhead = $ 20 * 750 hours
Overhead = $ 15,000
Full product cost = Direct material cost + labour cost + Overhead cost
Full product cost = $ 50,000 + $ 25000 + $ 15000 = $ 90,000.
Thus, Unit product cost = Full product cost / Total units
Unit product cost = $ 90,000 / 800
Unit product cost = $ 112.50 per unit.
B)
mark-up percentage of 20% of the full product cost, how much profit/loss would this job make.
Here. Full product cost = $ 90,000 and markup = 20% on cost.
Thus, Selling price = Product cost + 20% markup
Selling price = $ 90,000 + 20%
Selling Price = $ 108,000.
Thus, Profit on Job = Selling price - product cost
Profit on Job = $ 108,000 - 90,000
Profit on job = $18,000
3.
industry benchmark for manufacturing overhead for similar jobs is 50% of direct labour,
i.e Overhead cost based on the industry standards = 50% of direct labour
Overhead cost based on the industry standards = $ 25000 * 50%
Overhead cost based on the industry standards = $ 12,500.
Actual Overhead charged for the job = $ 15,000
Here,
For the job, Manufacturing overhead is higher than a similar job from the industry standards.
Reason : The Industry standards used the labour cost as the allocation base for the determination of the manufacturing overhead, whereas the Azure has used the machine hours as a basis of allocation of the manufacturing overhead for the given job, since the machine hours are used more than half proportionate of labours, so the manufacturing cost is higher in the case of job.