Question

Problem 2-16 (Algo) Plantwide Predetermined Overhead Rates; Pricing [LO2-1, LO2-2, LO2-3]

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates:

Direct labor-hours required to support estimated production		160,000
Machine-hours required to support estimated production		80,000
Fixed manufacturing overhead cost	$	480,000
Variable manufacturing overhead cost per direct labor-hour	$	5.00
Variable manufacturing overhead cost per machine-hour	$	10.00

During the year, Job 550 was started and completed. The following information is available with respect to this job:

Direct materials	$	240
Direct labor cost	$	233
Direct labor-hours		15
Machine-hours		5

Required:

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

2. Assume that Landen’s controller believes that machine-hours is a better allocation base than direct labor-hours. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

(Round your intermediate calculations to 2 decimal places. Round your Predetermined Overhead Rate answers to 2 decimal places and all other answers to the nearest whole dollar.)

Answer 1

1. Direct labor-hours as the allocation base:

a. Plantwide predetermined overhead rate = $8.00 per direct labor hour

Explanation:

Estimated fixed manufacturing overhead cost = $ 480,000

Estimated direct labor hours = 160,000 hours

Estimated fixed manufacturing overhead cost per direct labor hour = $480,000 / 160,000 = $3.00 per direct labor hour

Estimated variable manufacturing overhead cost per direct labor hour = $5.00 per direct labor hour

Plantwide predetermined overhead rate = Estimated fixed manufacturing overhead cost per direct labor hour + Estimated variable manufacturing overhead cost per direct labor hour = $3.00 + $5.00 = $8.00 per direct labor hour

b. Total manufacturing cost of Job 550 = $593

Explanation:

Total manufacturing cost of a job includes the direct material cost, direct labour cost and applied manufacturing overhead cost.

Manufacturing overhead applied = Plantwide predetermined overhead rate as per direct labor hours × Total direct labor hours for the job = $8 × 15 = $120

c. Selling price for Job 550 = $1,779

Explanation:

Markup percentage = 200%

Cost = $593

Selling price = Cost + (Cost × Markup percentage) = $593 + ($593 × 200%) = $1,779

.2 Machine-hours as the allocation base:

a. Plantwide predetermined overhead rate = $16.00 per machine hour

Explanation:

Estimated fixed manufacturing overhead cost = $ 480,000

Estimated machine- hours = 80,000 machine-hours

Estimated fixed manufacturing overhead cost per machine- hour = $480,000 / 80,000 = $6.00 per machine- hour

Estimated variable manufacturing overhead cost per machine hour = $10.00 per machine hour

Plantwide predetermined overhead rate = Estimated fixed manufacturing overhead cost per machine hour + Estimated variable manufacturing overhead cost per machine hour

= $6.00 + $10.00 = $16.00 per machine hour

b. Total manufacturing cost of Job 550 = $553

Explanation:

Total manufacturing cost of a job includes the direct material cost, direct labour cost and applied manufacturing overhead cost.

Manuufacturing overhead applied = Plantwide predetermined overhead rate as per machine hours × Total machine hours for the job = $16 × 5 = $80

c. Selling price for Job 550 = $1,659

Explanation:

Markup percentage = 200%

Cost = $553

Selling price = Cost + (Cost × Markup percentage) = $553 + ($553 × 200%) = $1,659