Question

Marine Components produces parts for airplanes and ships. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus 1 and client 2). The work done for client 1 will all be done under fixed-price contracts while the work done for client 2 will all be done under cost-plus contracts. The controller fixed fee (cost plus). For the upcoming year (year 2), Marine expects only two clients (client Marine Components chose direct labor cost as the allocation base in year 2, based on what she considered reflected the relation between overhead and client 3. Work for client 1 will continue to be billed using fixed- and direct labor cost. Year 3 is approaching and again the company only expects two clients: client price contracts, and client 3 will be billed based on cost-plus contracts. Manufacturing overhead for year 3 is estimated to be $21 million. Other budgeted data for year 3 include: Client 1 Client 3 Machine-hours 4,200 9.800 (thousands) Direct labor cost ($000) $3,500 $3,500 Required: a. Compute the predetermined rate assuming that Marine Components uses machine-hours to apply overhead. (Round your answer to 2 decimal places.) per machine hour Application rate b. Compute the predetermined rate assuming that Marine Components uses direct labor cost to apply overhead. % of direct labor cost Application rate

Answer 1

a) Predetermine overhead rate on the basis of machine hour = 21000000/14000000 = 1.5 per machine hour

b) Predetermine overhead rate on the basis of labor cost = 21000000/7000000 = 300% of labor cost