Question

In: Accounting

Azure has a job order and the following data have been recorded on its job cost...

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

Compute the unit product cost that would appear on the job cost sheet for this job.

Using a mark-up percentage of 20% of the full product cost, how much profit/loss would this job make?

Considering the industry benchmark for manufacturing overhead for similar jobs is 50% of direct labour, identify whether this job has a manufacturing overhead lower or higher than a similar job using the industry benchmark. Briefly explain what could cause a difference.

Solutions

Expert Solution

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.

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

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.

ekkarill92 answered 1 year ago

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