Question

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		28,000
Fixed overhead cost	$	364,000
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	$	777
Direct labor cost	$	215
Direct labor-hours used		2

Compute Mr. Wilkes’ total job cost.

3. If Speedy establishes its selling prices using a markup percentage of 30% of its total job cost, then how much would it have charged Mr. Wilkes?

Answer 1

Answer:

1. Predetermined overhead rate

Predetermined overhead rate = Estimated Fixed Overhead cost / Estimated total Direct Labor hours

                                                      = $364,000 / 28,000 hours

                                                      = $13 per Direct labor hour

2. Total Job cost

Variable overhead applied to job = 2 Direct labor hours * $1 per Direct Labor hour = $2

Fixed overhead applied to job = 2 Direct labor hours * $13 per Direct Labor hour = $26

So, the total Job cost = $1,020

3. Selling price

The markup percentage is 30% of total job cost

The total job cost is $1,020

So,the Selling price = $1,020 * 130% = $1,326

The company should charge $1,326.