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 $9,900 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	$	302,000			$	217,000			$	407,000			$	926,000
Manufacturing overhead	$	522,000			$	938,680			$	95,000			$	1,555,680

    
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	$	12,100			$	900			$	5,500			$	18,500
Direct labor	$	6,600			$	1,800			$	13,000			$	21,400
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.

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

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.)

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.)

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?

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

    

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			$	89,000			$	410,000			$	1,259,000
Direct labor	$	318,000			$	210,000			$	340,000			$	868,000
Manufacturing overhead	$	560,000			$	830,000			$	91,000			$	1,481,000

       

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

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

Cutting

Machining

Assembly

Total Plant

Answer 1

1a)	plantwide overhead rate
	Estimated MOH /Estimated direct labor hour
	1,555,680	/	926,000
	168%
b)	Applied overhead
	overhead rate		*	total direct labor hrs on hastings job
	168%		*	21,400
	35952
2)a)				Cutting	Machining	Assembly	total plant
	Manufacturing overhead			522,000	938,680	95,000	1,555,680
	Direct labor cost			302,000	217,000	407,000	926,000
	MOH rate			173%	433%	23%	168%
b)				Cutting	Machining	Assembly	total plant
	direct labor cost			6,600	1,800	13,000	21,400
	MOH Rate			173%	433%	23%
	overhead applied			11418	7794	2990	22202
4a)				Cutting	Machining	Assembly	total
	Direct materials			12,100	900	5,500	18,500
	direct labor			6,600	1,800	13,000	21,400
	overhead applied			11088	3024	21840	35952
	total manufacturing cost			29,788	5,724	40,340	75,852
							150%
	bid price						113778	answer
b)				Cutting	Machining	Assembly	total
	Direct materials			12,100	900	5,500	18,500
	direct labor			6,600	1,800	13,000	21,400
	overhead applied			11418	7794	2990	22202
	total manufacturing cost			30,118	10,494	21,490	62,102
							150%
	bid price						93153
5-a)				Cutting	Machining	Assembly	total
	Actual manufacturing overhead			560,000	830,000	91,000	1,481,000
	Applied overhead			534240	352800	571200	1458240
	under applied			25,760	477,200	-480,200	22,760
b)				Cutting	Machining	Assembly	total
	Actual manufacturing overhead			560,000	830,000	91,000	1,481,000
	Applied overhead			549656	908400	79361	1537417
	under applied			10,344	-78,400	11,639	-56,417