Question

Dotsero Technology, Inc., has a job-order costing system. The company uses departmental predetermined overhead rates to apply manufacturing overhead cost to individual jobs. The predetermined overhead rate in Department A is based on machine hours, and the rate in Department B is based on direct labour hours. At the beginning of the most recent year (i.e., January 1, 2012), the company's management made the following estimates for the coming year:

Department

A B

Machine hours 80,000 21,000

Direct labour hours 35,000 65,000

Direct materials cost $190,000 $400,000

Direct labour cost $280,000 $530,000

Manufacturing overhead cost $416,000 $720,000

Job 243 entered into production on April 1, 2012, and all 24 units of product in the job were completed on May 1, 2012. The company's cost records show the following information about the job:

Department

A B

Machine hours 350 70

Direct labour hours 80 130

Direct materials cost $940 $1,200

Direct labour cost $710 $980

At the end of the year (December 31, 2012), the records of Dotsero showed the following actual total cost and operating data for all jobs worked on during the year:

Department

A B

Machine hours 73,000 24,000

Direct labour hours 30,000 68,000

Direct materials cost $165,000 $420,000

Direct labour cost $265,000 $510,000

Manufacturing overhead cost $390,000 $740,000

Required:

1. Compute the predetermined overhead rates for Department A and Department B at the beginning of the year 2012. ( 3 marks)

2. Compute the total overhead cost applied to Job 243 during the year 2012. ( 2 marks)

3. What was the total cost of Job 243 once the job was completed? ( 1 mark)

4. Compute the amount of under-applied or over-applied overhead in each department, and in total, at the end of the current year (December 31, 2012). Based on this analysis, comment on the apparent relative quality of this job costing system for generating useful cost information. Briefly justify your answer. ( 5 marks)

5. Return to the original data at the beginning of the question. Assume that, instead of two separate departmental overhead rates, the company uses a single plant-wide overhead application rate based on direct materials cost as the allocation base. Compute the single predetermined overhead application rate for Dotsero Company as of the beginning of the year 2012, and the amount of overhead which would be applied to Job 243.  

Answer 1

Estimated cost as on 01/01/2012
	Dept A	Dept B
Machine Hours	80000.00	21000.00
Direct Labour Hours	35000.00	65000.00
Direct Material cost	$        190,000.00	$        400,000.00
Direct Labour Cost	$        280,000.00	$        530,000.00
Manufacturing Overhead Cost	$        416,000.00	$        720,000.00
Manufacturing Overhead Cost / machine hour	$5.20	$34.29

Job No:243
	Dept A	Dept B
Machine Hours	350.00	70.00
Direct Labour Hours	80.00	130.00
Direct Material cost	$940.00	$1,200.00
Direct Labour Cost	$710.00	$980.00
Manufacturing Overhead Cost	$1,820.00	$2,400.00
Total Cost	$3,470.00	$4,580.00

Applied cost as on 31/12/2012
	Dept A	Dept B
Machine Hours	73000.00	24000.00
Direct Labour Hours	30000.00	68000.00
Direct Material cost	$        165,000.00	$        420,000.00
Direct Labour Cost	$        265,000.00	$        510,000.00
Manufacturing Overhead Cost	$        390,000.00	$        740,000.00
Total Cost	$820,000.00	$1,670,000.00
Manufacturing Overhead Cost / machine hour	$5.34	$30.83
Over Applied Overhead Rate	0.14
Under applied Overhead Rate		3.45

Relative quality of this job costing system for generating useful cost information.

1. Costs are determined for Each Job order which may differ from one order to the other based on the specifications in each job. It applies mainly for the Garment & Art Industry

2. The Profit or loss for Each job can be determined against the cost and revenue of the order

3. It Facilitates in producuction planning. Standards are fixed and deviations are corrected.