“Don’t tell me we’ve lost another bid!” exclaimed Sandy Kovallas, president of Lenko Products, Inc. “I’m afraid so,” replied Doug Martin, the operations vice president. “One of our competitors underbid us by about $10,200 on the Hastings job.” “I just can’t figure it out,” said Kovallas. “It seems we’re either too high to get the job or too low to make any money on half the jobs we bid anymore. What’s happened?”
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Lenko Products manufactures specialized goods to customers’ specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made at the beginning of the year: |
| Department | ||||||||
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| Cutting | Machining | Assembly | Total Plant | |||||
| Direct labor | $ | 306,000 | $ | 202,000 | $ | 414,000 | $ | 922,000 |
| Manufacturing overhead | $ | 530,000 | $ | 831,760 | $ | 95,000 | $ | 1,456,760 |
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Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows: |
| Department | ||||||||
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| Cutting | Machining | Assembly | Total Plant | |||||
| Direct materials | $ | 11,900 | $ | 900 | $ | 5,600 | $ | 18,400 |
| Direct labor | $ | 6,600 | $ | 1,700 | $ | 12,900 | $ | 21,200 |
| Manufacturing overhead | ? | ? | ? | ? | ||||
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| The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. |
| Required: | |
| 1. | Assuming the use of a plantwide overhead rate: |
| a. |
Compute the rate for the current year. |
| b. |
Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. |
| 2. |
Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions: |
| a. | Compute the rate for each department for the current year. |
| b. |
Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. (Round your intermediate calculations to the nearest percent.) |
| 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). (Round your intermediate calculations to the nearest percent.) |
| a. |
What was the company’s bid price on the Hastings job if plantwide overhead rate had been used to apply overhead cost? |
| b. |
What would the bid price have been if departmental overhead rates had been used to apply overhead cost? |
| 5. |
At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year: |
|
Department |
||||||||
| Cutting | Machining | Assembly | Total plant | |||||
| Direct materials | $ | 761,000 | $ | 90,000 | $ | 409,000 | $ | 1,260,000 |
| Direct labor | 321,000 | 210,000 | 340,000 | 871,000 | ||||
| Manufacturing overhead | $ | 561,000 | $ | 830,000 | $ | 93,000 | $ | 1,484,000 |
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| a. |
Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used. (Round your intermediate calculations to the nearest percent.) |
| b. |
Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used. (Enter all overapplied values as negative numbers. Round your intermediate calculations to the nearest percent.) |
References
eBook & Resources
WorksheetLearning Objective: 04-01 Compute a predetermined overhead rate.Learning Objective: 04-03 Compute the total cost and average cost per unit of a job
Difficulty: HardLearning Objective: 04-02 Apply overhead cost to jobs using a predetermined overhead rate.Learning Objective: 04-04 Compute underapplied or overapplied overhead cost.
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