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 14,000 $140,000 $ 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 $650 $295 5 Compute Mr. Wilkes' total job cost. 3. If Speedy establishes its selling prices using a markup percentage of 50% of its total job cost, then how much would it have charged Mr. Wilkes?

Answer 1

1. Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated total units in the allocation base.

Predetermined overhead rate = $154000 / 14,000 hours (140000+($1x14000hrs))
Predetermined overhead rate (including variable overheads)= $11.00 per direct labor hour.

2. Calculation of total job cost-

Direct Material	$650
Direct labour	$295
Overhead applied (5DLH x $11)	$55
Total cost assigned to Mr. Wilkes	$1000

Markup percentage would be 50% of total job

So amount of markup=$1000x50/100 = $500

Amount charged to Mr. Wilkes=$1000+$500=$1,500

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