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 $10,200 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

Direct labor                                           301,000                        219,000                           419,000                       939,000

Manufacturing overhead                       526,000                       810,890                            81,000                          1,417,890

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                                                     $11,900                              $900                                         $5,700                               $18,500

Direct labor                                                            $6,400                               $ 1,800                                     $13,000                              $21,200

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.

Predetermined overhead rate.......................% of direct labor cost

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

Manufacturing overhead cost....................................

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.)

                                                                                       Predetermined Overhead Rate

Cutting department...................................%

Machining department...............................%

Assembly department.................................%

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.)

Manufacturing overhead cost...........................

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?

Bid price with plant wide rate..............................

b.What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

Bid price with department rate........................................

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                               $760,000                   $91,000                       $410,000               $1,261,000

Direct labor                                     $317,000                   $209,000                     $340,000                $866,000

Manufacturing overhead                 $559,000                  $831,000                      $92,000                  $1,482,000    

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

.............................overhead cost...........................

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

Cutting....................................overhead cost.......................

Machining...............................overhead cost.......................

Assembly................................overhead cost....................

Total plant..............................overhead cost......................

Answer 1