Question

In: Accounting

John Company of Akron, Ohio has two manufacturing departments—Machining and Assembly. The company considers all of...

John Company of Akron, Ohio has two manufacturing departments—Machining and Assembly. The company considers all of its manufacturing overhead costs to be fixed costs. It provided the following estimates at the beginning of the year as well as the following information with respect to Jobs A and B:

Estimated Data

Machining

Assembly

Total

Manufacturing overhead

$500,000

$100,000

$600,000

Direct labor-hours

10,000

50,000

60,000

Machine-hours

50,000

5,000

55,000

Job A

Machining

Assembly

Total

Direct labor-hours

5

10

15

Machine-hours

11

2

13

Job B

Machining

Assembly

Total

Direct labor-hours

4

5

9

Machine-hours

12

3

15

Required

  1. If John Company uses a plantwide predetermined overhead rate with direct labor-hours as the allocation base, how much manufacturing overhead cost would be applied to Job A? Job B? Show your work.
  1. Assume that John Company uses departmental predetermined overhead rates. The Machining Department is allocated based on machine-hours and the Assembly Department is allocated based on direct labor-hour. How much manufacturing overhead cost would be applied to Job A? Job B? Show your work.
  1. If John Company multiplies its job costs by a markup percentage to establish selling prices, how might plantwide allocation adversely affect the company’s pricing decision?

Solutions

Expert Solution

Solution A:

Pre determined overhead rate = Estimated manufacturing overhead /Estimated direct labor hours

= $600,000 / 60000 = $10 per direct labor hour

Manufacturing overhead cost applied to Job A = 15*$10 = $150

Manufacturing overhead cost applied to Job A = 9*$10 = $90

Solution B:

Computation of Departmental Overhead rates
Particulars Machining Assembly
Overhead Cost (Expected) $500,000.00 $100,000.00
Allocation Base Machine hours Direct labor hours
Quantity of Allocation Base $50,000.00 $50,000.00
Overhead rate $10.00 $2.00
Computation of Overhead cost applied to Job
Particulars Job A Job B
Overhead applied - Machining $110.00 $120.00
Overhead applied - Assembly $20.00 $10.00
Total Overhead Applied $130.00 $130.00

Solution 3:

If John Company multiplies its job costs by a markup percentage to establish selling prices, then plantwide overhead rate  adversely affect the company’s pricing decision as Job A will be overprice and Job B will be underpriced due to improper allocation.


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