Big Boomers makes custom clubs for golfers. The company also provides repair services for golfers with broken clubs. Most of the work is done by hand and with small tools used by craftsmen. Customers are quoted a price in advance of their clubs being manufactured or repaired. To produce and repair clubs at a profit, management must have a thorough understanding of product costs.
Jeff Ranck. manager of the business, is considering using either direct labor hours or the number of jobs as the basis for allocating overhead costs. He has estimated the following amounts for the coming year:
Estimated total overhead | $180,000 |
Estimated direct labor hours | 15,000 |
Estimated number of jobs | 2,500 |
Instructions
a. Compute the overhead application rate based on (1) direct labor hours and (2) the number of jobs.
b. Shown below is information for two customer orders:
Job 1 Manufacture a full set of custom clubs. Direct materials used. $300; direct labor hours, 12: direct labor cost. $276.
Job 2 Repair broken putter and replace grips on a full set of irons. Direct materials used. $100: direct labor hours. 3: direct labor cost, $60.
Determine the total cost of each job assuming that overhead costs are applied on the basis of:
1. Direct labor hours
2. Number of jobs
c. Discuss the results obtained in part b. Which overhead application method appears to provide more realistic results? Explain the reasoning behind your answer.
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