Question

"Don't tell me we've lost another bid!" exclaimed Sandy Kovallas, president of Lenko Products, Inc. "I'm afraid so," replied Doug Martin, the operations vice president. "One of our competitors underbid us by about $10,100 on the Hastings job." "I just can’t figure it out," said Kovallas. "It seems we’re either too high to get the job or too low to make any money on half the jobs we bid anymore. What’s happened?" Lenko Products manufactures specialized goods to customers' specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost.

The following estimates were made at the beginning of the year:

Department Cutting Machining Assembly Total Plant

	Department
	Cutting				Machining				Assembly				Total Plant
Direct labor	$	315,000			$	201,000			$	413,000			$	929,000
Manufacturing overhead	$	536,000			$	941,720			$	83,000			$	1,560,720

Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows:

Department Cutting Machining Assembly Total Plant Direct materials

	Department
	Cutting				Machining				Assembly				Total Plant
Direct materials	$	12,000			$	900			$	5,500			$	18,400
Direct labor	$	6,500			$	1,700			$	12,900			$	21,100
Manufacturing overhead		?				?				?				?

The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.

Required: 1. Assuming the use of a plantwide overhead rate:

a. Compute the rate for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.

2. Suppose that instead of using a 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.(Round predetermined overhead percentages to the nearest whole percent.)

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. (Round your predetermined overhead percentages to the nearest whole percent.)

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 Hastings job if the plantwide overhead rate had been used to apply overhead cost?

b.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 assembled the following actual cost data relating to all jobs worked on during the year: Department Cutting Machining Assembly Total Plant Direct materials $ 761,000 $ 90,000 $ 410,000 $ 1,261,000 Direct labor $ 317,000 $ 211,000 $ 341,000 $ 869,000 Manufacturing overhead $ 560,000 $ 831,000 $ 93,000 $ 1,484,000

a. Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used.

b. Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used.

Answer 1

Answer 1,4 (a)
Use of a plant wide overhead rate
Manufacturing overhead				1,560,720
Divided by: Direct labor				929,000
Overhead rate on labor Cost				168%
	Cutting	Machining	Assembly	Total
Direct materials	12,000	900	5,500	18,400
Direct labor	6,500	1,700	12,900	21,100
Manufacturing overhead (Direct labor*168%)	10,920	2,856	21,672	35,448
Total Manufacturing cost				74,948
Job bid At (Total Manufacturing cost *150%)				112,422
Answer 2, 4 (b)
Use of a departmental overhead rate
	Cutting	Machining	Assembly	Total
Manufacturing overhead	536,000	941,720	83,000	1,560,720
Divided by: Direct labor	315,000	201,000	413,000	929,000
Overhead rate on labor Cost	170%	469%	20%
Direct labor	6500	1700	12900
Multiply: Overhead rate on labor Cost	170%	469%	20%
Allocated overhead	11050	7973	2580
	Cutting	Machining	Assembly	Total
Direct materials	12,000	900	5,500	18,400
Direct labor	6,500	1,700	12,900	21,100
Manufacturing overhead	11,050	7,973	2,580	21,603
Total Manufacturing cost				61,103
Job bid At (Total Manufacturing cost *150%)				91,655
Answer 5
Use of a plant wide overhead rate
Actual manufacture overhead				1,484,000
Overhead cost allocated (869000*168%)				1,459,920
Under applied of overhead				24,080
Use of a departmental overhead rate
	Cutting	Machining	Assembly	Total
Direct labor cost	317000	211000	341000
Multiply: departmental overhead rate	170%	469%	20%
Overhead cost allocated	538900	989590	68200	1596690
Actual manufacture overhead	560000	831000	93000	1484000
Overhead cost allocated	538900	989590	68200	1596690
Under applied (over) of overhead	21,100	(158,590)	24,800	(112,690)
Over applied of overhead		158,590		112,690
Under applied of overhead	21,100		24,800