Question

) Genex Company produces custom robots for industrial applications. The company uses a job order costing system. Its plant has three production departments: molding, finishing, and assembly. The estimated manufacturing overhead cost and direct labor cost for each department for 2020 follow:

                                                                      Molding               Finishing              Assembly

      Manufacturing Overhead cost              $800,000               $600,000               $100,000

      Direct labor cost                                    $200,000               $300,000               $500,000

In May 2020, the company received an invitation from DeLong Manufacturing Company to bid on an order of three custom robots that must be delivered by the end of September 2020. This DeLong Job would require direct manufacturing costs in the three departments as follows:

                                                                      Molding               Finishing              Assembly

      Direct material cost                                 $12,000                   $   800                 $ 4,600

      Direct labor cost                                      $ 7,000                   $2,000                 $15,000

Required:

a. Assume that a single, plantwide predetermined manufacturing cost driver rate based on direct labor cost is used. Determine the manufacturing cost driver rate and manufacturing overhead costs applied to the DeLong Job.

b. As an alternative assume that separate, departmental predetermined manufacturing cost driver rates based on direct labor cost are used in each department. Determine the departmental manufacturing cost driver rates and manufacturing overhead costs applied to the DeLong job.

c. Assume that Genex has a policy to add a 70% markup to estimated job costs to arrive at the bid price. Determine the bid price for the DeLong job using:

1. a plantwide manufacturing overhead cost driver rate;

2. departmental manufacturing overhead cost driver rates.

d. Review the bid prices computed in (c). Why do the two bids differ?

e.   What are the possible consequences of overbidding a job? Underbidding a job?

Answer 1

a) Single Plant wide predetermined overhead rate Fixed manufacturing overhead $1,500,000 Direct labor cost $1,000,000 Overhead absorption rate 150% of Direct labor cost Manufacturing overhead applied Direct labor cost Overhead as % of Direct labor cost Manufacturing overhead applied $24,000 150% $36,000 b) Departmental Overhead absorption rates Molding Fixed manufacturing overhead $800,000 Direct labor cost $200,000 Overhead absorption rate 400% Finishing $600,000 $300,000 200% Assembly $100,000 $500,000 20% of Direct labor cost Manufacturing overhead applied Direct labor cost Overhead as % of Direct labor cost Manufacturing overhead applied Molding Finishing $7,000 $2,000 400% 200% $28,000 $4,000 Assembly $15,000 20% $3,000 Total Cost $17,400 c) Calculation of Bid price -plantwide rate based 1) Direct material Molding Dept $12,000 Finishing Dept $800 Assembly Dept $4,600 Direct Labor cost Molding Dept $7,000 Finishing Dept $2,000 Assembly Dept $15,000 Manufacturing overhead applied Total Manufacturing cost Add: Mark up at 70% Bid price $24,000 $36,000 $77,400 $54,180 $131,580 2) Calculation of Bid price - Departmental rates based Total Cost Direct material Molding Dept $12,000 Finishing Dept $800 Assembly Dept $4,600 $17,400 Direct Labor cost Molding Dept $7,000 Finishing Dept $2,000 Assembly Dept $15,000 $24,000 Manufacturing overhead applied Molding Dept $28,000 Finishing Dept $4,000 Assembly Dept $3,000 $35,000 Total Manufacturing cost $76,400 Add: Mark up at 70% $53,480 Bid price $129,880 d) The bid prices are different due to the overheads rates applied Plantwide overhead rates gives different bid from the department bid rate applied The reason is absorption rate for overhead is different e) Consequences Overbidding a job can lead to loss of business since quote is not competitive Underbidding can lead to gross margin loss since bid price is not enough to cover manufacturing cost