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 Fixed overhead cost Variable overhead cost per direct labor-hour 42,000 $ 693,000 $ 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 Direct labor cost Direct labor-hours used $ 660 $ 175 10

Answer 1

1.

Predetermined overhead rate = Variable overhead cost per direct labor-hour + Fixed overhead cost/Estimated direct labor hours

= 1 + 693,000/42,000

= 1 + 16.5

= $17.5 per direct labor hour

2.

Overhead applied = Actual direct labor hours used x Predetermined overhead rate

= 10 x 17.5

= $175

Job cost sheet (Mr. Wikes)

Direct material	660
Direct labor	175
Overhead applied	175
Total cost assigned to Mr. Wilkes	$1,010

3.

Markup percentage = 60% of total job cost

Mark up = 1,010 x 60%

= $606

Amount charged to Mr. Wilkes = Total cost assigned to Mr. Wilkes + Mark up

= 1,010 + 606

= $1,616

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