Question

Challenge 2: Job-Order Costing for Customized Work

Based on your advice, High-End Lifts has moved forward and set up the production process to build all of its residential elevators in-house. In the past, High-End Lifts utilized the cost estimates provided by the production company as the basis for quoting prices to its residential customers and did not bear the risk of cost overruns or manufacturing delays. Now that they are manufacturing products, they need a more sophisticated system for estimating costs, bidding on jobs, and tracking actuals against budgeted costs for planning and control purposes. They’ve asked for your help in setting up a system to quote and track the cost of custom jobs that are received for custom projects. You’ve recommended the use of a job order costing system since each job is budgeted and track based on customized specifications.

Suggested Preparation: Use the Challenge 2 Workbook (found in "Resources") to complete the definitions related to the job ordering costing. Watch the videos to gain a stronger understanding of the concepts.

Task 1: Calculate a predetermined overhead application rate using budgeted direct-labor hours as the cost driver. High-End Lifts uses a volume-based, plant-wide approach to allocating overhead. They use direct-labor hours as the cost driver for determining the budgeted rate.

Task 2: High-End Lifts received a request for proposal (RFP #240A) from Top Quality Builders, Inc. to manufacturer 6 custom-sized elevators for a small condominium project in Lake Bonaventure, NY for delivery on 10-1-18 (installation is not required). High-End Lifts has the in-house capacity to complete the job without incurring additional overhead costs.

Required:

1) Determine the price and bid the job as specified in the RFP #240A. The RFP has specified that the bid include the cost of delivering the units to the construction site. High-End Lifts, Inc. has estimated that the delivery expense for the six elevators including insurance while in transit, is $1,500. This amount will be figured into the total cost of the bid, after accounting for the mark-up on cost. High-End Lifts, Inc. is aware that one of its competitiors is also bidding on the job. To compete, High-End Lifts wants to price the job at 40% gross margin rather than their standard 50% on the regular product line-up. Standard limited warranty on all High-End elevators is 5 years, parts and labor related to all power and hydraulic lift components.

These elevators are slightly larger than the residential elevators they normally build and based on their estimates, these units will require 10% more in direct materials and 15% more in direct labor hours than their standard elevators. THe standard costs on the regular elevators are $55,000 for direct materials and $68,750 for direct labor which is based on an average of 400 hours per elevator. For the new units, manufacturing overhead will be budgeted using the pre-determined overhead rate calcualted in Task #1. For pricing the job, High-End Lifts will use the pre-determined overhead rate x the budgeted direct labor hours for the job.

2) They've asked you to help write a proposal to bid on the job. Draft a proposal letter to Mike Bower at Top Quality Builders, Inc., 100 West 1st Street, Oswego, NY. In the letter, write a brief summary of the company, High-End Lifts, Inc., what you want to help the prospect accomplish, a timeline for getting the work done, pricing, warranty information and contact information. High-End Lifts, Inc. is located at 1001 James Street, Syracuse, NY 13111, the CEOs name is Skylar Cab, and the business cell number is 315-555-1234.

I need help with task 2. Here is the information from task 1, completed.

TASK #1 PDOHR
HIGH-END LIFTS
BUDGETED MOH
57,333	Depreciation on PP&E
48,000	Property Taxes
32,777	Utilities
65,000	Insurance
117,200	Indirect labor & benefits
53,140	Indirect materials
373,450	TOTAL BUDGETED MOH
BUDGETED DIRECT LABOR HOURS
$      1,890,625	TOTAL BUDGETED COST OF DL ($68,750 x 27.5 units)
11,000	TOTAL BUDGETED DL HOURS: 27.5 units x 5 workers x 2 weeks x 40 hours per week (400 hours per elevator).
$           171.88	DL$ per hour
PREDETERMINED MOH RATE
$         373,450	TOTAL BUDGETED MOH
11,000	TOTAL BUDGETED DL HOURS
$             33.95	Predetermined MOH Rate per DLH = Total Budgeted MOH / Total Budgeted DLH

Answer 1

Standard Applied overhead per elevator (400 hours *33.95)			13580
	Direct material	Direct labor	Applied overhead
Standard cost per elevator	55000	68750	13580
% increase in cost due to increase in Qty of material and hour	0.1	0.15	0.15
Increase in cost per evaluator (Standard cost per elevator * % increase in cost due to increase in Qty of material and hour)	5500	10312.5	2037
Revised standard cost per elevator (Standard cost per elevator + Increase in cost per evaluator)	60500	79062.5	15617
Cost for Six elevators (revised standard cost per elevator * 6)	363000	474375	93702
Gross margin is 40% of sales.
Suppose sales is 100, then gross margin is 40 and remaining 60 considered as manufacturing cost.
Gross margin = Manufacturing cost *40/60

Amount of delivery cost $ 1500 will be figured into the total cost of the bid, after accounting for the mark-up on cost.
Bid price for Six elevators	Amount ($)
Direct material	363000
Direct labor	474375
Applied manufacture overhead	93702
Manufacturing cost	931077
Manufacturing cost	931077
Add: Gross margin (931077 *40/60)	620718
Add: delivery cost	1500
Bid price for Six elevators	1553295