Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $3,000. 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 $ 371,000 $ 424,000 $ 95,400 $ 890,400 Direct labor $ 212,000 $ 106,000 $ 318,000 $ 636,000 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 $ 4,200 $ 500 $ 2,600 $ 7,300 Direct labor $ 5,200 $ 800 $ 7,400 $ 13,400 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

1.

Plantwide predetermined overhead rate = Estimated total plant manufacturing overhead / Estimated direct labor cost

Plantwide predetermined overhead rate = $890,400 / $636,000 = 1.4 or 140% of direct labor cost

Manufacturing overhead applied = $13,400 * 140% = $18,760

2.

Departmental predetermined overhead rate:

Fabricating = $371,000 / $212,000 = 1.75 or 175%

Machining = $424,000 / $106,000 = 4 or 400%

Assembly = $95,400 / $318,000 = 0.3 or 30%

Manufacturing overhead applied :

	Koopers Job
Fabricating ($5,200*175%)	$9,100
Machining ($800*400%)	3,200
Assembly ($7,400*30%)	2,220
Total manufacturing overhead applied	$14,520

4a.

Bid price on Koopers Job using plantwide predetermined overhead rate:

	Koopers Job
Direct materials	$7,300
Direct labor	13,400
Manufacturing overhead applied	18,760
Total manufacturing costs	$39,460
Bid price ($39,460*150%)	$59,190

4b.

Bid price on Koopers Job using departmental predetermined overhead rate:

	Koopers Job
Direct materials	$7,300
Direct labor	13,400
Manufacturing overhead applied	14,520
Total manufacturing costs	$35,220
Bid price ($35,220*150%)	$52,830