Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $4,000. 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	$	362,250	$	414,000	$	93,150	$	869,400
Direct labor	$	207,000	$	103,500	$	310,500	$	621,000

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	$	3,700		$	200		$	2,100		$	6,000
Direct labor	$	4,200		$	500		$	6,900		$	11,600
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

(1a)

Predetermined overhead rate

140%

of direct labor cost

Explanations :-

Predetermined overhead rate
Manufacturing overhead	$869,400
÷ Direct Labor cost	$621,000
	140%

(1b)

Manufacturing Overhead cost

$ 16,240

Explanations :-

Manufacturing Overhead cost
Direct Labor cost for Job	$11,600
X Predetermined overhead rate	140%
	$ 16,240

(2a)

	Predetermined Overhead Rate
Fabrication Department	175%
Machining Department	400%
Assembly Department	30%

Explanations :-

Fabrication Department
Manufacturing overhead	$362,250
÷ Direct Labor cost	$207,000
	175%
Machining Department
Manufacturing overhead	$414,000
÷ Direct Labor cost	$103,500
	400%
Assembly Department
Manufacturing overhead	$93,150
÷ Direct Labor cost	$310,500
	30%

(4a)

Company's bid Price

$        50,760

Explanations:-

Company's bid Price
Direct materials	$6,000
Direct labor	$11,600
Manufacturing overhead	$16,240
Total Manufacturing Cost	$33,840
Bid Price ($33840 * 150%)	$        50,760

(4b)

Company's bid Price

$        43,530

Explanations :-

Company's bid Price
Direct materials	$6,000
Direct labor	$11,600
Manufacturing overhead	$        11,420
Total Manufacturing Cost	$        29,020
Bid Price ($29020 * 150%)	$        43,530