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 50,000 $ 925,000 $ 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 $ 619 $ 254 Compute Mr. Wilkes' total job cost. 3. If Speedy establishes its selling prices using a markup percentage of 60% of its total job cost, then how much would it have charged Mr. Wilkes?

Answer 1

1. Predetermined Overhead rate = Budgeted or estimated total manufacturing overhead cost / Estimated labor hours for output

= $925,000 + ($50,000 $\times$ $1) / 50,000 hours = $19.5 per labour hour.

2. Mr. Wilkes job cost = Direct material + Direct labour cost + Variable overhead cost + Proportionate fixed overhead cost

= $619 + $254 + (6 $\times$ $1) + [($925,000 / 50,000) $\times$ 6]

= $990

3. Speedy selling price = Job cost + Markup percentage = $990 + (60% $\times$ $990) = $990 + $594 = $1,584

Therefore, $1,584 would be the amount charged by Speedy for Mr. Wilkes Job.