Question

“Don’t tell me we’ve lost another bid!” exclaimed Janice Hudson, president of Prime Products Inc. “I’m afraid so,” replied Doug Martin, the operations vice president. “One of our competitors underbid us by about $13,000 on the Hastings job.” “I just can’t figure it out,” said Hudson. “It seems we’re either too high to get the job or too low to make any money on half the jobs we bid. What’s happened?”

Prime Products manufactures specialized goods to customers’ specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labour cost. The following estimates were made at the beginning of the year:

	Department
	Cutting			Machining			Assembly			Total Plant
Direct labour	$	324,000		$	216,000		$	432,000		$	972,000
Manufacturing overhead	$	583,200		$	864,000		$	108,000		$	1,555,200

Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows:

	Department
	Cutting			Machining			Assembly			Total Plant
Direct material	$	24,800		$	2,500		$	8,800		$	36,100
Direct labour	$	14,500		$	4,900		$	22,600		$	42,000
Manufacturing overhead		?			?			?			?

The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.

1. Assuming the use of a plantwide overhead rate:

a. Compute the rate for the current year.

Predetermined overhead rate = %

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.

Manufacturing overhead cost =

2. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:

a. Compute the rate for each department for the current year.

	Predetermined Overhead Rate
Cutting department	%
Machining department	%
Assembly department	%

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.

Manufacturing overhead cost =

3. Assume that it is customary in the industry to bid jobs at 140% of total manufacturing cost (direct materials, direct labour, and applied

a. What was the company’s bid price on the Hastings job?

company's bid price =

b. What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

company's bid price =

4. At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year:

	Department
	Cutting			Machining			Assembly			Total Plant
Direct material	$	832,000		$	98,000		$	442,000		$	1,372,000
Direct labour	$	352,000		$	234,000		$	365,600		$	951,600
Manufacturing overhead	$	616,000		$	924,900		$	98,900		$	1,639,800

a. Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used.

b. Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used.

Cutting	?	?
Machining	?	?
Assembly	?	?
Total Plant	?	?

Answer 1

Requirement 1 (a) Estimated Plantwide Manufacturing OH Estimated Plantwide Direct labor cost Plantwide Predetermined OH rate (1555200/972000) $ $ 15,55,200 9,72,000 160% $ (b) Total Direct labor cost incurred for Hastings job Predetermined OH rate Manufacturing OH applied (42000*160%) 42,000 160% 67,200 $ The manufacturing OH cost using plantwide OH rate is $ 67,200. Requirement 2 (a) Department Est. Mfg. OH (0) $ 5,83,200 $ 8,64,000 $ 1,08,000 Cutting Department Machining Department Assembly Department Pre-determined OH rate (111)=(0)/(11) 180% 400% 25% Est. DL cost (0) 3,24,000 2,16,000 4,32,000 $ $ $ (b) Department DL cost incurred (0) 14,500 4,900 22,600 Cutting Department Machining Department Assembly Department Pre-determined | Manufacturing OH rate OH applied (11) (111)=(1)*(11) 180% 26,100 400% 1,225 25% 90,400 Total $ 1,17,725 The manufacturing OH cost using departmental OH rates is $ 117,725.

Requirement 3 Computation of Bid price (a) using Plantwide OH rate Total Direct Material Total Direct Labor Total Manufacturing OH applied Total Manufacturing cost 36,100 42,000 67,200 1,45,300 $ Bid Price (145300*140%) $ 2,03,420 $ (b) using Departmental OH rate Total Direct Material Total Direct Labor Total Manufacturing OH applied Total Manufacturing cost 36,100 42,000 1,17,725 1,95,825 $ Bid Price (195825*140%) $ 2,74,155

Requirement 4 Computation of underapplied or overapplied OH (a) Using Plantwide OH rate Total Direct Labor cost $ 9,51,600 Applied Manufacturing OH (951600*160%) $ 15,22,560 Actual Manufacturing OH $ 16,39,800 Under-Applied OH (1639800-1522560) $ 1,17,240 The manufacturing oH for the year is under-applied by $ 117,240 using plantwide OH rate. (b) using Departmental OH rate Department Direct Labor Cost Predetermined OH rate (1) Applied Actual Manufacturing Manufacturing OH (11)=(0)*(11) 6,33,600 $ 6,16,000 $ 9,36,000$ 9,24,900 $ 91,400 $ 98,900 $ 16,61,000 $ 16,39,800 Cutting Machining Assembly $ $ $ 3,52,000 2,34,000 3,65,600 180% 400% 25% Total Applied Manufacturing OH Actual Manufacturing OH Over-Applied OH (1661000-1639800) $ 16,61,000 $ 16,39,800 $ 21,200 The manufacturing oH for the year is over-applied by $ 21,200 using plantwide OH rate.