Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $4,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.”

Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year:

	Department
	Fabricating		Machining		Assembly		Total Plant
Manufacturing overhead	$	383,250	$	438,000	$	98,550	$	919,800
Direct labor	$	219,000	$	109,500	$	328,500	$	657,000

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

	Department
	Fabricating			Machining			Assembly			Total Plant
Direct materials	$	4,900		$	400		$	3,300		$	8,600
Direct labor	$	6,600		$	700		$	8,100		$	15,400
Manufacturing overhead		?			?			?			?

Required:

1. Using the company's plantwide approach:

a. Compute the plantwide predetermined rate for the current year.

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

2. Suppose that instead of using a plantwide predetermined overhead rate, the company had used departmental predetermined overhead rates based on direct labor cost. Under these conditions:

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

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

4. Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labor, and applied overhead).

a. What was the company’s bid price on the Koopers job using a plantwide predetermined overhead rate?

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

Answer 1

Answer-

1.a. Plantwide predetermined overhead rate = Total estimated manufacturing overhead / Total estimated direct labor cost = $919,800 / $657000 = 140% of direct labor cost

1.b. Manufacturing overhead cost applied to Koopers job = 140% x $15400 = $21,560

2.a.		Department
		Fabricating	Machining	Assembly
	Manufacturing overhead $	383,250	438,000	98,550
	Direct labor $	219,000	109,500	328,500
	Predetermined overhead rate %	175%	400%	30%
		($383,250/$219.000)	($438,000/$109,500)	($98,550/$328,500)
2.b.	Koopers Job	Department
		Fabricating	Machining	Assembly	Total
	Direct materials $	4900	400	3300	8600
	Direct labor $	6600	700	8100	15400
	Manufacturing overhead $	11,550	2800	2430	16780
		(175% x $6600)	(400% x $700)	(30% x $8100)

4.a.	Koopers Job - Plantwide overhead rate
	Direct materials $	8600
	Direct labor $	15400
	Manufacturing overhead $	21560
	Total manufacturing cost $	45,560
	Bid price $ (150% x $45,560)	68,340
4.b.	Koopers Job - Departmental overhead rate
	Direct materials $	8600
	Direct labor $	15400
	Manufacturing overhead $	16,780
	Total manufacturing cost $	40,780
	Bid price $ (150% x $40,780)	61,170