Question

Collier Company installs carpet.  Since each customers’ needs are different, Collier Company uses job costing.  Upon accepting a customer’s order, the carpet selected is cut at the warehouse to correct dimensions and then the carpet is delivered and installed at the customer’s facility.  Collier has decided to use a predetermined overhead rate based on machine hours.  The estimated annual overhead is $585,000 with an estimated 2,600 machine hours.  The following information relates to Job 101:

direct materials      $10,000

direct labor cost       7,000

labor hours                40

machine hours               8

A. If a markup of 20% is applied to all orders, what is the sales price for Job 101?

B. Suppose that Collier Company decided to use a separate overhead rate for the cutting and installation processes.  The overhead rate for cutting would be based on machine hours and the installation process would be based on labor hours.  If $585,000 estimated annual overhead is separated as follows, what would be the applied overhead to Job 101?

                        Estimated Overhead      Estimated Hour Usage

     cutting                $390,000             2,600 machine hours

     installation            195,000             2,000 labor hours

Answer 1

• All working forms part of the answer
• Requirement A

----Working----

A	Annual Overhead	$        585,000.00
B	Estimated machine hours	2600
C=A/B	Overhead rate per machine hour	$                225.00
D	Job 01 no. of machine hours	8
E=C x D	Overheads allocated	$            1,800.00

Answer:

A	Direct Materials	$          10,000.00
B	Direct Labor Cost	$            7,000.00
C	Allocated overhead cost	$            1,800.00
D=A+B+C	Total cost	$          18,800.00
E=D x 20%	Mark Up 20%	$            3,760.00
F = D+E	Sales Price	$          22,560.00

• Requirement B

----Working----

Working		Cutting	Installation	Total
A	Total Overheads	$              390,000.00	$        195,000.00	$        585,000.00
B	No. of hours of allocation basis	2600	2000
C=A/B	Overhead rate per (machine or labor) hour	$                       150.00	$                  97.50
		per machine hours	per labor hour
D	No. of hours for Job 101	8	40
		machine hours	labor hours
E = C x D	Overhead allocated	$                   1,200.00	$            3,900.00	$             5,100.00

Answer

A	Direct Materials	$          10,000.00
B	Direct Labor Cost	$            7,000.00
C	Allocated overhead cost	$            5,100.00
D=A+B+C	Total cost	$          22,100.00
E=D x 20%	Mark Up 20%	$            4,420.00
F = D+E	Sales Price	$          26,520.00