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 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
	Fabricating		Machining		Assembly		Total Plant
Direct labor	$	214,000	$	107,000	$	321,000	$	642,000
Manufacturing overhead	$	374,500	$	428,000	$	96,300	$	898,800

    

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	$	4,400	$	400	$	2,800	$	7,600
Direct labor	$	5,600	$	700	$	7,600	$	13,900
Manufacturing overhead		?		?		?		?

   

The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.

    

Required:
	Assuming use of a plantwide overhead rate:

a.

Compute the rate for the current year.

Predetermined overhead rate

%

of direct labor cost

c.

Compute the rate for each department for the current year.

	Predetermined Overhead Rate
Fabricating Department		%
Machining department		%
Assembly department		%

d.

Determine the amount of manufacturing overhead cost that would have been applied to
the Koopers job.

	Manufacturing overhead cost

Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labor, and applied overhead).

e. What was the company's bid price on the Koopers job if a plantwide overhead rate had been used to apply overhead cost?

	Company's bid price

f. What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

	Company's bid price

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

$

204,000   

$

17,400   

$

128,000   

$

349,400   

  Direct labor

224,000   

122,000   

276,000   

622,000   

  Manufacturing overhead

$

385,000   

$

458,000   

$

86,300   

$

929,300   

g. Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used.

overhead cost

h.

Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used. (Enter overapplied overhead costs as negative amounts and underapplied overhead costs as positive amounts.)

Fabricating
Machining
Assembly
Total plant

Answer 1

Teledex Company

Assuming use of plantwide overhead rate –

1. Computation of the rate for each department for the current year:

Predetermined overhead rate = total manufacturing overhead/total direct labor cost

Total manufacturing overhead = $898,800

Total direct labor cost = $642,000

Predetermined overhead rate = (898,800/642,000) x 100 = 140%

	Direct labor	manufacturing overhead cost	departmental overhead rate
Fabrication	$214,000	$374,500	175%
Machining	$107,000	$428,000	400%
Assembly	$321,000	$96,300	30%
Total	$642,000	$898,800

D determination of the manufacturing overhead that would havebeen applied to Koopersjob:

Manufacturing overhead cost = $14,880

Computations –

	Direct labor	Proportion	manufacturing overhead cost
Fabrication	$5,600	175%	$9,800
Machining	$700	400%	$2,800
Assembly	$7,600	30%	$2,280
Total	$13,900		$14,880

Manufacturing overhead cost is calculated as a proportion of direct labor. For instance, manufacturing overhead cost for fabrication department,

= 5,600x 175% = $9,800

Machining department = 700 x 400% = $2,800

Assembly = 7,600 x 30% = $2,280

E. bid price when plantwide overhead rate is used –

Bid price = 150% of manufacturing cost

Manufacturing cost total plant -

Direct materials = $7,600

Direct labor = $13,900

Manufacturing overhead = $19,460(13,900 x 140% = $19,460)

Total manufacturing cost = $40,960

Bid price = 150% of $40,960 = $61,440

Hence, the bid price when the plantwide overhead rate is used is $61,440

F. determination of bid price if departmental overhead rates have been used:

Bid price = 150% of manufacturing cost

Manufacturing cost –

Direct material = $7,600

Direct labor = $13,900

Manufacturing overhead = $14,880

Total manufacturing cost = $36,380

Bid price = 150% x 36,380 = $54,570

Hence, the bid price when the departmental overhead rates have been used is $54,570

G. Computation of underapplied or overapplied overhead based on plantwide rate:

Estimated manufacturing overhead = $898,800

Actual overhead $929,300

Underapplied overhead = $30,500

	Direct labor	plantwide overhead rate	manufacturing overhead cost	Actual overhead cost	Overapplied (underapplied overhead)
Fabrication	$214,000	140.00%	$299,600	$385,000	($85,400)
Machining	$107,000	140%	$149,800.00	$458,000	($308,200)
Assembly	$321,000	140.00%	$449,400	$86,300	$363,100
Total	$642,000		$898,800	$929,300	($30,500)

H. Computation of underapplied or overapplied overhead based on departmental overhead rate:

	Direct labor	Departmental overhead rate	manufacturing overhead cost	Actual overhead cost	Overapplied (underapplied overhead)
Fabrication	$214,000	175%	$374,500	$385,000	($10,500)
Machining	$107,000	400%	$428,000	$458,000	($30,000)
Assembly	$321,000	300%	$96,300	$86,300	$10,000
Total	$642,000		$898,800	$929,300	($30,500)