Question

Taveras Corporation is currently operating at 50% of its available manufacturing capacity. It uses a job-order costing system with a plantwide predetermined overhead rate based on machine-hours. At the beginning of the year, the company made the following estimates:

Machine-hours required to support estimated production . . . . 165,000

Fixed manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . $1,980,000

Variable manufacturing overhead cost per machine-hour . . . . $2.00

Required: 1. Compute the plantwide predetermined overhead rate. 2. During the year, Job P90 was started, completed, and sold to the customer for $2,500. The following information was available with respect to this job:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,150

Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $830

Machine-hours used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Compute the total manufacturing cost assigned to Job P90. 3. Upon comparing Job P90’s sales revenue to its total manufacturing cost, the company’s chief financial officer said “If this exact same opportunity walked through our front door tomorrow, I’d turn it down rather than making it and selling it for $2,500.” a. Construct an argument (supported by numerical analysis) that refutes the chief financial officer’s assertion. b. Construct an argument (accompanied by numerical analysis) that supports the chief financial officer’s assertion.

Answer 1

Solution 1:

Plantwide predetermined overhead rate = Variable overhead rate per machine hour + Fixed overhead rate per machine hour

= $2 + (Estimated fixed manufacturing overhead / Estimated machine hours)

= $2 + ($1,980,000 / 165000) = $14 per machine hour

Solution 2:

Computation of manufacturing cost assigned to Job P90
Particulars	Amount
Direct material	$1,150.00
Direct labor	$830.00
Variable manufacturing overhead (72*$2)	$144.00
Total variable cost	$2,124.00
Fixed manufacturing overhead (72*$12)	$864.00
Total manufacturing cost assigned to Job P90	$2,988.00

Solution 3a:

Variable cost of Job P90 = $2,124

Selling price = $2,500

Contribution margin from Job P90 = $2,500 - $2,124 = $376

Although manufacturing cost assigned to Job P90 is $2,988, however it is providing contribution margin of $376. Fixed manufacturing cost is irrelevant as company has to incur this cost irrespective of we accept job offer or not. Fixed cost is just an allocated cost. If CFO assertion is accepted then it will result in loss of contribution margin of $376 to the company.

Solution 3b:

Total cost assigned to Job P 90 = $2,988

Selling price of Job P90 = $2,500

Net profit (Loss) from job = $2,500 - $2,988 = ($488)

As job P90 is resulting in loss, therefore CFO assertion is true, accepting job at such price will make company to incur loss as fixed cost cannot be ignored as job we are accepting to make profit after recovering variable and fixed costs.