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	378,000	432,000	97,200	907,200
Direct Labor	216,000	108,000	324,000	648,000

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	4,600	200	3,000	7,800
Direct Labor	6,000	500	7,800	14,300
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

1a)usind plantwide approach ,Predetermined overhead rate =Estimated overhead /estimated direct labor cost

                                                      = 907200/648000

                                                     = 1.4 or 140% of direct labor cost

b)Overhead Applied =Actual labor cost *predetermined overhead rate

                      = 14300 *140%.

                      = 20020

2a)

	Fabricating	Machining	Assembly`
Manufacturing overhead	378000	432000	97200
Direct labor cost	216000	108000	324000
Departmental overhead rate	378000/216000=1.75 or 175%	432000/108000=4 or 400%	.30 or 30%

b)

	Fabricating	Machining	Assembly`	Total
Actual direct labor cost	6000	500	7800	14300
Overhead applied	6000*175%= 10500	500*400%= 2000	7800*30%= 2340	14840

4)

a)

Direct material	7800
Direct labor	14300
overhead applied	20020
Total cost	42120
Bid price	42120*150%= 63180

b)

Direct material	7800
Direct labor	14300
overhead applied	14840
Total cost	36940
Bid price	36940*150%= 55410

Answer 2

1.a)

Plantwide Predetermined Rate = Budgeted Plantwide Cost/Budgeted Total Labor cost

= $907,200/$648,000

= 1.4/Direct Labor

1.b)

Manufacturing Overhead Applied to Koopers Job = Actual Direct Labor cost Incurred * predetermined rate.

= $14,300 * 1.4

= $20,020

2.a)

Predetermined Overhead Rate for each department = Budgeted overhead cost/Budgeted Labor Cost

For Fabrication Department:-

= $378,000/$216,000

= 1.75

For Machining Department:-

= $432,000/$108,000

= 4

For Assembly Department:-

= $97,200/$324,000

= .3

2.b)

Manufacturing overhead Applied to Koopers Job:-

Fabrication Department = $6,000*1.75 =$10,500

Machining Department = $500*4 = $ 2,000

Assembly Department = 7,800*.3 = $ 2,340

Total Overhead Applied = $14,840

4.a)

Company's Bid price on Koopers Job Under plantwide predetermined rate:-

Direct Materials = $7,800

Direct Labor = $14,300

Overhead Applied = $20,020 (calculated in 1.b)

Total Cost = $42,120

Bid price of Company = $42,120+($42,120*150%)   

= $105,300

4.b)

Company's Bid price for Koopers Job under Departmental predetermined rate:-

  Direct Material = $7,800

Direct Labor = $14,300

Overhead Applied = $14,840 (calculated in 2.b)

Total cost = $36,940

Bid price of Company = $36,940+($36,940*150%)

= $92,350