Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $2,000. 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 $ 353,500 $ 404,000 $ 90,900 $ 848,400 Direct labor $ 202,000 $ 101,000 $ 303,000 $ 606,000 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 $ 3,200 $ 200 $ 1,600 $ 5,000 Direct labor $ 3,200 $ 500 $ 6,400 $ 10,100 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 1a:

Plantwide predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor cost

= $848,400 / $606,000 = 140% of direct labor cost

Solution 1b:

Manufacturing overhead applied to Koopers Job = Direct labor cost * 140% = $10,100 * 140% = $14,140

Solution 2a:

Computation of departmental overhead rates
Particulars	Fabricating	Machining	Assembly
Estimated manufacturing overhead	$353,500	$404,000	$90,900
Direct labor cost	$202,000	$101,000	$303,000
Departmental overhead rate (Based on direct labor cost)	175%	400%	30%

Solution 2b:

Computation of manufacturing overhead applied - Kooper's Job
Particulars	Fabricating	Machining	Assembly	Total
Direct labor cost	$3,200.00	$500.00	$6,400.00
Departmental overhead rate (% of direct labor cost)	175%	400%	30%
Manufacturing overhead applied	$5,600.00	$2,000.00	$1,920.00	$9,520.00

Solution 4a:

Company's bid price on Kooper Job
Particulars	Amount
Direct materials	$5,000.00
Direct labor	$10,100.00
Manufacturing overhead	$14,140.00
Total manufacturing cost	$29,240.00
Bid Price (150% of total manufacturing cost)	$43,860.00

Solution 4b:

Company's bid price on Kooper Job
Particulars	Amount
Direct materials	$5,000.00
Direct labor	$10,100.00
Manufacturing overhead	$9,520.00
Total manufacturing cost	$24,620.00
Bid Price (150% of total manufacturing cost)	$36,930.00