Question

In: Accounting

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates:

     
Direct labor-hours required to support estimated production   150,000
Machine-hours required to support estimated production   75,000
Fixed manufacturing overhead cost $ 420,000
Variable manufacturing overhead cost per direct labor-hour $ 4.60
Variable manufacturing overhead cost per machine-hour $ 9.20
 

During the year, Job 550 was started and completed. The following information is available with respect to this job:

     
Direct materials $ 195
Direct labor cost $ 288
Direct labor-hours   15
Machine-hours   5
 

Required:

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

2. Assume that Landen’s controller believes that machine-hours is a better allocation base than direct labor-hours. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

(Round your intermediate calculations to 2 decimal places. Round your Predetermined Overhead Rate answers to 2 decimal places and all other answers to the nearest whole dollar.)

Solutions

Expert Solution

Concepts and reason

Predetermined overhead rate: It is that rate based on which the overhead expenses are absorbed over the period. It is generally a blanket rate that is further multiplied with the most important factor of production, which can be labor hours or machine hours, to calculate the overhead expense for the year.

Fundamentals

Cost accounting: It is an accounting process in which the costs involved in the process, project are recorded and analyzed. The purpose of cost accounting is to allocate costs to different products and determine the selling price per unit.

Direct materials: These are the materials used in the production process, which constitutes an integral portion of the final product, the cost of which is identifiable and traceable. The cost of direct material can be directly chargeable to the final product compared to the indirect material.

Direct labor: Workers or employees directly involved in the manufacture of goods and services are called direct labor. Direct labor can be directly traceable to a specific product or cost center.

Overhead Cost: It can be referred to as an accounting term that states all the indirect expenses incurred by an organization for operating a business. These expenses are not directly related to the manufacturing of a product or rendering of a service.

1.a.

Compute the predetermined overhead rate based on labor hours using the equation as follows:

OverheadRate=Variableoverheadrate+Fixedoverheadrate=$4.6+$2.8=$7.40OverheadRate=Variableoverheadrate+Fixedoverheadrate=$4.6+$2.8=$7.40

Hence, the predetermined overhead rate is $7.40 per hour.

Working Note:

Compute the fixed overhead rate as per labor hour basis using the equation as follows:

Fixedoverheadrate=FixedmanufacturingoverheadcostLaborhoursrequiredtosupportestimatedproduction=$420,000150,000=$2.8perlaborhourFixedoverheadrate=FixedmanufacturingoverheadcostLaborhoursrequiredtosupportestimatedproduction=$420,000150,000=$2.8perlaborhour

Hence, the fixed overhead rate is $2.80 per labor hour.

1.b.

Compute the manufacturing cost of job 550 using the equation as follows:

Manufacturingcost=Directmaterials+Directlabor+Manufacturingoverheads=$195+$288+$111=$594Manufacturingcost=Directmaterials+Directlabor+Manufacturingoverheads=$195+$288+$111=$594

Hence, the total manufacturing cost is $594.

Working Note:

Compute the manufacturing overheads using the equation as follows:

ManufacturingOverheads=Predeterminedrate×Laborhours=$7.4×15=$111ManufacturingOverheads=Predeterminedrate×Laborhours=$7.4×15=$111

Hence, the manufacturing overheads are $111.

1.c.

Compute the selling price for Job 550 using the equation as follows:

SellingPrice=ManufacturingCost+200%ofManufacturingcost=$594+(200%×$594)=$594+$1,188=$1,782SellingPrice=ManufacturingCost+200%ofManufacturingcost=$594+(200%×$594)=$594+$1,188=$1,782

Hence, the selling price for Job 550 is $1,782.

2.a.

Compute the predetermined overhead rate based on machine hours using the equation as follows:

OverheadRate=Variableoverheadrate+Fixedoverheadrate=$9.2+$5.6=$14.80OverheadRate=Variableoverheadrate+Fixedoverheadrate=$9.2+$5.6=$14.80

Hence, the predetermined overhead rate is $14.80 per hour.

Working Note:

Compute the fixed overhead rate as per machine hour basis using the equation as follows:

Fixedoverheadrate=FixedmanufacturingoverheadcostMachinehoursrequiredtosupportestimatedproduction=$420,00075,000=$5.6permachinehourFixedoverheadrate=FixedmanufacturingoverheadcostMachinehoursrequiredtosupportestimatedproduction=$420,00075,000=$5.6permachinehour

Hence, the fixed overhead rate is $5.6 per machine hour.

2.b.

Compute the total manufacturing cost of job 550 using the equation as follows:

Manufacturingcost=Directmaterials+Directlabor+Manufacturingoverheads=$195+$288+$74=$557Manufacturingcost=Directmaterials+Directlabor+Manufacturingoverheads=$195+$288+$74=$557

Hence, the total manufacturing cost of Job 550 is $557.

Working Note:

Compute the manufacturing overheads using the equation as follows:

ManufacturingOverheads=Predeterminedrate×Machinehours=$14.8×5=$74ManufacturingOverheads=Predeterminedrate×Machinehours=$14.8×5=$74

Hence, the manufacturing overheads are $74.

2.c.

Compute the selling price of Job 550 using the equation as follows:

SellingPrice=ManufacturingCost+200%ofManufacturingcost=$557+(200%×$557)=$557+$1,114=$1,671SellingPrice=ManufacturingCost+200%ofManufacturingcost=$557+(200%×$557)=$557+$1,114=$1,671

Hence, the selling price for Job 550 is $1,671.

 


Ans: Part 1.a

The predetermined overhead rate is $7.40 per hour.

Part 1.b

The total manufacturing cost is $594

Part 1.c

The selling price for Job 550 is $1,782

Part 2.a

The predetermined overhead rate is $14.80 per machine hour

Part 2.b

The total manufacturing cost of Job 550 is $557

Part 2.c

The selling price for Job 550 is $1,671

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