Question

"Don't tell me we've lost another bid!" exclaimed Sandy Kovallas, president of Lenko Products, Inc. "I'm afraid so," replied Doug Martin, the operations vice president. "One of our competitors underbid us by about $9,800 on the Hastings job." "I just can’t figure it out," said Kovallas. "It seems we’re either too high to get the job or too low to make any money on half the jobs we bid anymore. What’s happened?"  

  
Lenko 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 labor cost. The following estimates were made at the beginning of the year:

    

	Department
	Cutting				Machining				Assembly				Total Plant
Direct labor	$	310,000			$	213,000			$	400,000			$	923,000
Manufacturing overhead	$	525,000			$	929,640			$	96,000			$	1,550,640

    
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 materials	$	11,900			$	900			$	5,600			$	18,400
Direct labor	$	6,400			$	1,600			$	12,900			$	20,900
Manufacturing overhead		?				?				?				?

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

5. 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 materials	$	760,000			$	90,000			$	410,000			$	1,260,000
Direct labor	$	318,000			$	210,000			$	341,000			$	869,000
Manufacturing overhead	$	559,000			$	830,000			$	93,000			$	1,482,000

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

Answer 1

Plantwide Overehad Rate- Estimated Manufacturing Overehad/Total Direct labour cost Plantwide Overehad Rate 1550640/923000 Plantwide Overehad Rate 1.68 Times Underapplied or overapplied overhead using plantwide overhead rates : Department Particulars Total Plant Cutting Machining 830,000 352,800 Assembly Actual MOH Incurred 559,000 93,000 1,482,000 Applied MOH @ 1.68 of Direct Labour 534,240 572,880 1,459,920 (318000 -1.68) (210000 *1.68) (341000 1.68) Underapplied or (Over Applied) 24,760 477,200 (479,880) 22,080 Departmental overhead rates: Department Particulars Cutting Machining 929,640 213,000 4.36 Assembly Manufacturing Overhead Direct Labour Departmental overhead rates 525,000 310,000 1.69 96,000 400,000 0.24 Underapplied or overapplied overhead using Departmental rates: Department Machining 830,000 916,546 (210000*4.36) Particulars Total Plant Cutting Assembly Actual MOH Incurred Applied MOH using above Departmental Rates 559,000 538,548 (318000*1.69) 20,452 93,000 1,482,000 81,840 1,536,935 (341000#0.24) Underapplied or (Over Applied) (86,546) 11,160 (54,935)