Question

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“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’ specification and operates a job order system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made were made at the beginning of the year: Department Fabrication Machining Assembly Total Plant Direct Labor $200,000 $100,000 $300,000 $600,000 Manufacturing Overhead $350,000 $400,000 $90,000 $840,000 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 Fabrication Machining Assembly Total Plant Direct Materials $3,000 $200 $1,400 $4,600 Direct Labor $2,800 $500 $6,200 $9,500 Manufacturing Overhead ? ? ? ? The company uses a plant wide overhead rate to apply manufacturing overhead cost to jobs. Required: 1. Assuming use of a plant wide overhead rate: a. Compute the rate for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to Koopers job. 2. Suppose that instead of using plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions: a. Compute the 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.

3. Explain the difference between the manufacturing overhead that would have been applied to the Koopers job using plantwide rate in question 1 (b) and using the departmental rates in question 2 (b). 4. Assume that it is customary in the industry to bid jobs at 150% of the total manufacturing cost (direct materials, direct labor, and applied overhead). What was the company’s bid price on the Koopes job? What would the bid price have been if departmental overhead rates had been used to apply overhead cost? 5. At the end of the year, the company estimated the following actual data relating to all job worked on during the year: Department Fabrication Machining Assembly Total Plant Direct Materials $190,000 $16,000 $114,000 $320,000 Direct Labor $210,000 $108,000 $262,000 $580,000 Manufacturing Overhead $360,000 $420,000 $84,000 $864,000 Compute the underapplied or overapplied overhead for the year (a) assuming that a plantwide overhead rate rates are used and (b) assuming that departmental overhead rates is used.

Answer 1

1. Plantwide overhead rate
a. Overhead rate for current year
= Total Manufacturing overhead/Total direct labour cost
= $840000/$600000
=1.4
b. Amount of Manufacturing overhead cost that would have
been applied to Kooper's Job
= Direct Labour Cost x Overhead rate
= $9500 x 1.4
= $ 13300
2. Department Overhead rate
a. Overhead rate for each department for current year
Department	Fabrication	Machining	Assembly	Total Plant
Direct Labour	200,000	100,000	300,000	600,000
Manufacturing overhead	350,000	400,000	90,000	840,000
Overhead rate	1.75	4.00	0.30
Overhead rate = Manufacturing overhead/Direct labour cost
b. Amount of Manufacturing overhead cost that would have
been applied to Kooper's Job
= Direct Labour Cost x Overhead rate
Department	Fabrication	Machining	Assembly	Total Plant
Direct Material	3,000	200	1,400	4,600
Direct Labour	2,800	500	6,200	9,500
Manufacturing Overhead	4,900	2,000	1,860	8,760
3. Manufacturing overheads applied to Kooper's Job using plantwide
Overhead rate is more than overhead allocated using departmental rates
Departmental rate gives a more specific allocation based on cost driver.
Plantwide rate is a single rate on which the manufacturing overheads are
allocated to a specific job, irrespective of the department.
4. Bid price if plantwide overhead rate is used
Total manufacturing cost = $4600+$9500+$13300
= $27400
Bid Price = 150% x 27400
= $41100
Bid price if Departmental rate is used
Total Manufacturing Cost = $4600+$9500+$8760
= $22860
Bid Price = $22860 x 150%
= $34290
5.Actual Data for the year
Department	Fabrication	Machining	Assembly	Total Plant
Direct Material	190,000	16,000	114,000	320,000
Direct Labour	210,000	108,000	262,000	580,000
Manufacturing Overhead	360,000	420,000	84,000	864,000
a. Plantwide overhead rate is used
Manufacturing overhead = $580000*1.4
= $ 812000
Manufacturing overhead are overapplied by $ 52000 (864000-812000)
b. Departmental rates are used
Department	Fabrication	Machining	Assembly	Total Plant
Direct Labour	210,000	108,000	262,000	580,000
Overhead rate	1.75	4.00	0.30
Manufacturing Overhead applied	367,500	432,000	78,600	878,100
Actual Manufacturing overhead	360,000	420,000	84,000	864,000
Overapplied	7,500	12,000		19,500
Under applied			5,400	5,400