Question

Job Costs Using a Plantwide Overhead Rate

Naranjo Company designs industrial prototypes for outside companies. Budgeted overhead for the year was $367,500, and budgeted direct labor hours were 21,000. The average wage rate for direct labor is expected to be $35 per hour. During June, Naranjo Company worked on four jobs. Data relating to these four jobs follow:

	Job 39	Job 40	Job 41	Job 42
Beginning balance	$25,300	$34,300	$15,500	$1,100
Materials requisitioned	20,100	23,800	8,300	12,400
Direct labor cost	11,200	20,900	2,950	3,300

Overhead is assigned as a percentage of direct labor cost. During June, Jobs 39 and 40 were completed; Job 39 was sold at 110 percent of cost. (Naranjo had originally developed Job 40 to order for a customer; however, that customer was near bankruptcy and the chance of Naranjo being paid was growing dimmer. Naranjo decided to hold Job 40 in inventory while the customer worked out its financial difficulties. Job 40 is the only job in Finished Goods Inventory.) Jobs 41 and 42 remain unfinished at the end of the month.

Required:

1. Calculate the overhead rate based on direct labor cost.

% of direct labor cost

2. Set up a simple job-order cost sheet for all jobs in process during June.

Naranjo Company
Job-Order Cost Sheets
	Job 39	Job 40	Job 41	Job 42
Balance, June 1	$	$	$	$
Total	$	$	$	$

3. What if the expected direct labor rate at the beginning of the year was $28 instead of $35? What would the overhead rate be? If required, round your overhead rate answer to one decimal place.

New budgeted direct labor cost = $

New overhead rate = % of direct labor cost

How would the cost of the jobs be affected?

Answer 1

1. Calculate the overhead rate based on direct labor cost.
Budgeted direct labor hours were 21,000.
Average wage rate for direct labor is expected to be $35 per hour.
Therefore,
Budgeted direct labor cost = 21,000 x $35 = $735,000
And,
Budgeted overhead for the year was $367,500.
Thus,
Overhead rate based on direct labor cost = $367,500/$735,000 = 50% of direct labor cost
2. Set up a simple job-order cost sheet for all jobs in process during June.
Naranjo Company
Job-Order Cost Sheets
			Job 39	Job 40	Job 41	Job 42
Balance, June 1			25300	34300	15500	1100
Materials requisitioned			20100	23800	8300	12400
Direct labor cost			11200	20900	2950	3300
Manufacturing overhead applied			5600	10450	1475	1650
Total			62200	89450	28225	18450
3. What if the expected direct labor rate at the beginning of the year was $28 instead of $35? What would the overhead rate be? If required, round your overhead rate answer to one decimal place.
									New budgeted direct labor cost = 21,000 x $28 = $588,000
New overhead rate = $367,500/$588,000 = 62.50% of direct labor cost
How would the cost of the jobs be affected?
The cost of jobs would increase.