Question

Problem 2-16 Plantwide Predetermined Overhead Rates; Pricing [LO2-1, LO2-2, LO2-3]

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		155,000
Machine-hours required to support estimated production		77,500
Fixed manufacturing overhead cost	$	465,000
Variable manufacturing overhead cost per direct labor-hour	$	4.80
Variable manufacturing overhead cost per machine-hour	$	9.60

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

Direct materials	$	210
Direct labor cost	$	349
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.)

Answer 1

Solution

(1) - Plantwide overhead rate as per direct labour hours

(a) - Total overhead cost (Fixed + variable)

= 465000 + (155000*$4.8) = $1209000

Total Labour hours = 155000 hours

Plantwide overhead rate = ($1209000/155000) = $7.8

(b) - Total Manufacturing cost

Direct Material	$210
Direct Labout	$349
Overhead Cost ($7.8*15)	$117
Manufacturing cost	$676

(c) Selling price calculation

Cost = $676

Markup = 200% of selling cost

Profit = ($676*200%) = $1352

Selling price = ($676+$1352) = $2028

(2) - Plantwide overhead rate as per direct machine hours

(a) - Plant wide overhead rate

Fixed cost (A)	$465000
Variable cost ($77500*$9.6) (B)	$744000
Total cost (A+B)	$1209000
Machine hours	77500
Plantwide overhead rate ($1209000/77500)	$15.6

(b) Manufacturing cost

Direct Material	$210
Direct Labour	$349
Overhead cost ($15.6*5)	$78
Total manufacturing cost	$637

(c) Selling price calculation

Cost (A)	$637
Markup on cost	200%
Profit ($637*200%) (B)	$1274
Sales price (A+B)	$1911