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	$	369,250	$	422,000	$	94,950	$	886,200
Direct labor	$	211,000	$	105,500	$	316,500	$	633,000

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	$	4,100		$	400		$	2,500		$	7,000
Direct labor	$	5,000		$	700		$	7,300		$	13,000
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

Requirement 1a
Plant wide predetermined manufacturing overhead rate
= Total manufacturing overheads /Total Direct labour
= $886,200/$633,000
=$1.40 per labour dollar
Requirement 1b
Application of Manufacturing overhead to Koopers Job
= Total direct Labor X predetermined overhead rate
= $13,000 X$1.4
= $18,760
Requirement 2a
Departmental predetermined manufacturing overhead rate
	Department
	Fabrication	Machining	Assembly	Total Plant
Manufacturing overhead	3,69,250	4,22,000	94,950	8,86,200
Direct labor	2,11,000	1,05,500	3,16,500	6,33,000
Manufacturing overhead rate	1.75	4.00	0.30
Requirement 2b
Application of Manufacturing overhead to Koopers Job
	Department
	Fabrication	Machining	Assembly	Total
Direct labor	5,000	700	7,300
Manufacturing overhead rate	1.75	4.00	0.30
Manufacturing overhead	8,750	2,800	2,190	13,740
	(5000 X1.75)	(700 X4.00)	(7300 X0.3)
Requirement 4a
Bid Price on the koopers job using a plant wide predetermined overhead rate
Direct materials	$7,000
Direct Labour	13,000
Manufacturing overheads applied	18,760
Total Manufacturing costs	38,760
Bid Price (150% of total manufacturing costs)	58,140
Requirement 4b
Bid Price on the koopers job using a departmental predetermined overhead rate
Direct materials	$7,000
Direct Labour	13,000
Manufacturing overheads applied	13,740
Total Manufacturing costs	33,740
Bid Price (150% of total manufacturing costs)	50,610