Question

Speedy Auto Repairs uses a job-order costing system. The company’s direct materials consist of replacement parts installed in customer vehicles, and its direct labor consists of the mechanics’ hourly wages. Speedy’s overhead costs include various items, such as the shop manager’s salary, depreciation of equipment, utilities, insurance, and magazine subscriptions and refreshments for the waiting room.

The company applies all of its overhead costs to jobs based on direct labor-hours. At the beginning of the year, it made the following estimates:

Direct labor-hours required to support estimated output		20,000
Fixed overhead cost	$	350,000
Variable overhead cost per direct labor-hour	$	1.00

Required:

1. Compute the predetermined overhead rate.

2. During the year, Mr. Wilkes brought in his vehicle to replace his brakes, spark plugs, and tires. The following information was available with respect to his job:

Direct materials	$	590
Direct labor cost	$	109
Direct labor-hours used		6

Compute Mr. Wilkes’ total job cost.

3. If Speedy establishes its selling prices using a markup percentage of 40% of its total job cost, then how much would it have charged Mr. Wilkes?

Answer 1

Concepts and reason

Job Order Costing:

Job order costing is a type of costing system where costs related to a particular job order are identified and allocated to that particular job in order to find out the total cost related to that particular job.

Job order costing is used by the companies who work on different jobs which have different production requirement that is job order costing is used when the companies are working on more than one job or one product. In job order costing cost is computed for individual jobs.

Fundamentals

Under Job order costing all the manufacturing costs, whether fixed or variable in nature is allocated to a particular job. It helps to find out the cost incurred for producing the goods for any particular job. At the time of preparation of final accounts it helps to find out the cost of goods sold in case of sales and inventory cost in case of closing stock.

Due to its features, job order costing system is helpful to the management in its planning and decision making process about any product. Since the cost related to any particular product is identified under this system, it also helps in controlling the cost of the product. Due to these features job order costing system is widely used in both manufacturing and services industries.

Calculate predetermined overhead rate.

Calculation of predetermined overhead rate:

$\begin{array}{c}\\{\rm{Predetermined Overhead Rate = }}\frac{{{\rm{Estimated total manufacturing overhead cost}}}}{{{\rm{Estimated total amount of the allocation base}}}}\\\\ = \frac{{\$ 370,000}}{{20,000}}\\\\ = \$ 18.50{\rm{ per direct labor hour}}\\\end{array}$

The predetermined overhead rate is $18.50.

Working Note:

Calculate the total manufacturing overhead.

Calculation of tptal manufacturing overhead:

$\begin{array}{c}\\Y{\rm{ }} = {\rm{ }}a{\rm{ }} + {\rm{ }}bX\\\\ = \$ 350,000 + \left( {20,000 \times \$ 1.00} \right)\\\\ = \$ 350,000 + \$ 20,000\\\\ = \$ 370,000\\\end{array}$

The total manufacturing overhead is $370,000.

Prepare a schedule to determine the total job cost.

Following schedule shows the total job cost:

The total job cost is $810.

Following schedule shows the calculation:

Calculate the amount of selling price that will be charged from Mr. W.

Calculation of the amount of selling price:

$\begin{array}{c}\\{\rm{Selling price = Total job cost}} \times {\rm{Markup }}\\\\ = \$ 810 \times 1.40\\\\ = \$ 1,134\\\end{array}$

The amount that will be charged from Mr. W is $1,134.

Ans: Part 1

The predetermined overhead rate is $18.50.

Part 2

Part 3

The amount that will be charged from Mr. W is $1,134.