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	$	351,750	$	402,000	$	90,450	$	844,200
Direct labor	$	201,000	$	100,500	$	301,500	$	603,000

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	$	3,100		$	300		$	1,500		$	4,900
Direct labor	$	3,000		$	600		$	6,300		$	9,900
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

Solution 1-a:

Plantwide predetermined rate = Estimated Total Manufacturing Overhead / Estimated Total Direct labor Cost

= $844200 / $603000 = 140%

Solution 1-b:

Manufacturing overhead applied to the Koopers job = Direct labor Cots on Kooers Job *140% = $9900*140% = $13,860

Solution 2-a:

Teledex Company
Computation of overhead rate for Each department
Particulars	Fabricating	Machining	Assembly
Overhead cost of deparment	$3,51,750	$4,02,000	$90,450
/Total direct labor Cost	$2,01,000	$1,00,500	$3,01,500
Overhead rate of department	175%	400%	30%

Solution 2-b:

Computation of Manufacturing Overhead applied to Koopers Job
Particulars	Fabricating	Machining	Assembly
Direct Labor	$3,000	$600	$6,300
Overhead rate of department	175%	400%	30%
Manufacturing overhead applied	$5,250	$2,400	$1,890

Solution 4-a:

Computation of Bid price on Koopers Job (Using Plantwide Overhead rate)
Particulars	Amount
Total Direct material	$4,900
Total Direct Labor	$9,900
Total manufacturing Overhead applied	$13,860
Total manufacturing cost	$28,660
Bid Price ($28660*150%)	$42,990

Solution 4-b:

Computation of Bid price on Koopers Job (Using Departmental Overhead rate)
Particulars	Amount
Total Direct material	$4,900
Total Direct Labor	$9,900
Total manufacturing Overhead applied	$9,540
Total manufacturing cost	$24,340
Bid Price ($24340*150%)	$36,510