Question

Problem 2-16 Plantwide Predetermined Overhead Rates; Pricing [LO2-1, LO2-2, LO2-3]

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates:

Direct labor-hours required to support estimated production		140,000
Machine-hours required to support estimated production		70,000
Fixed manufacturing overhead cost	$	784,000
Variable manufacturing overhead cost per direct labor-hour	$	2.00
Variable manufacturing overhead cost per machine-hour	$	4.00

During the year, Job 550 was started and completed. The following information is available with respect to this job:

Direct materials	$	175
Direct labor cost	$	225
Direct labor-hours		15
Machine-hours		5

Required:

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

2. Assume that Landen’s controller believes that machine-hours is a better allocation base than direct labor-hours. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

(Round your intermediate calculations to 2 decimal places. Round your Predetermined Overhead Rate answers to 2 decimal places and all other answers to the nearest whole dollar.)

Answer 1

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:

a) Predetermine overhead rate = (784000/140000)+2 = 7.60 per labour hour

b) Total manufacturing cost of job 550

Direct material	175
Direct labour	225
Manufacturing overhead applied (15*7.6)	114
Total manufacturing cost of job 550	514

c) Selling price = 514+(514*200%) = $1542

2. Assume that Landen has used machine hour

a) Predetermine overhead rate = (784000/70000)+4 = 15.20 per machine hour

b) Total manufacturing cost of job 550

Direct material	175
Direct labour	225
Manufacturing overhead applied (15.20*5)	76
Total manufacturing cost of job 550	476

c) Selling price = 476+(476*200%) = $1428