Question

Modern Metalworks Company has two? departments, milling and assembly. The company uses a job costing system with a plantwide cost driver rate that is computed by dividing plantwide overhead costs by total plantwide practical capacity direct labor hours. The following cost and practical capacity estimates are for? October:

The following information pertains to job 714, which was started and completed during? October:

Requirements

(a) Determine the cost of job 714. ?

(b) Suppose that instead of using the plantwide cost driver? rate, the company uses machine hours as the cost driver for the applying overhead costs in the milling? department, and uses direct labor hours as the cost driver in the assembly department. Compute these departmental cost driver rates and determine the cost of job 714 using these rates.

(c) Using the costs you computed in parts a and b, determine the bid price that Modern Metalworks will quote under each cost system if it uses a 25% markup on total manufacturing cost.

(d) Provide reasons why Modern Metalworks might prefer the method in part a or the one in part b.

Estimates

	Milling	Assembly
Overhead costs	$120,000	$160,000
Direct labor hours	8,000	12,000
Machine hours	12,000	6,000

PrintDone

Job information

	Milling	Assembly
Direct labor hours	10	40
Machine hours	18	8
Direct materials costs	$800	$50
Direct labor costs	$100	$600

Answer 1

(a)

	Milling	Assembly	Total
Overhead costs	$120,000	$160,000	$280,000
Direct labor hours	8,000	12,000	20,000

Direct labor hour rate = Total overheads/Total direct labor hours

= 280,000/20,000

= $14

Calculation of cost of job 714

	Milling ($)	Assembly ($)	Total ($)
Direct material cost	800	50	850
Direct labor cost	100	600	700
Prime cost	900	650	1,550
Add: Factory overheads	10 x 14 =140	40 x 14 = 560	700
Total Manufacturing cost	1,040	1,210	2,250

(b)

Overhead rate in Milling = Overheads/Machine hours

= 120,000/12,000

= $10 per machine hour

Overhead rate in Assembly = Overheads/Direct labor hours

= 160,000/12,000

= $13.33 per direct labor hour

Calculation of cost of job 714

	Milling ($)	Assembly ($)	Total ($)
Direct material cost	800	50	850
Direct labor cost	100	600	700
Prime cost	900	650	1,550
Add: Factory overheads	10 x 18 =180	13.33 x 40 = 533	713
Total Manufacturing cost	1,080	1,183	2,263

(c) Mark-up required = 25% on manufacturing cost

Total manufacturing cost in part (a) = $2,250

Mark-up = 2,250 x 25%

= $562.5

Bid price = Cost + Mark-up

= 2,250 + 562.5

= $2,812.5

Hence, bid price in part (a) = $2,812.5

Total manufacturing cost in part (b) = $2,263

Mark-up = 2,263 x 25%

= $565.75

Bid price = Cost + Mark-up

= 2,263 + 565.75

= $2,828.75

Hence, bid price in part (b) = $2,828.75

(d)

The company might prefer part (b) method due to the following reasons:

- Activity based costing is more appropriate and provides more accurate cost as compared to single plantwide rate method.

- Under part (b), mark-up earned by the company is higher as compared to part (a)