Question

"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 $9,800 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?"  

  
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
	Cutting				Machining				Assembly				Total Plant
Direct labor	$	310,000			$	213,000			$	400,000			$	923,000
Manufacturing overhead	$	525,000			$	929,640			$	96,000			$	1,550,640

    
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
	Cutting				Machining				Assembly				Total Plant
Direct materials	$	11,900			$	900			$	5,600			$	18,400
Direct labor	$	6,400			$	1,600			$	12,900			$	20,900
Manufacturing overhead		?				?				?				?

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.
Predetermined overhead rate ___________% of direct labor cost

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

Answer 1

Let's calculate the Plantwide Manufacturing Overhead rate first. Question states that direct labor is the variable for Overhead)

Plantwide overhead rate: Total Manufacturing Overhead / Total direct Labor = 1550640 / 923000 = 1.68

So the rate for current year is 1.68.

Predetermined Overhead rate is 168% of Direct Labor cost as calculated above.

Solution- B:

Since the company takes the order for customised items and uses job costing; for evert new bid, it should be considering the overhead rate per function/department and multiplying it by the labor cost incured for that specific department.

FOr computing the overhead rate for every department, data will look like:

	Cutting	Machining	Assembly
Labor	310000	213000	400000
Manufacturing Overhead	525000	929640	96000
Manufacturing Overhead rate	1.693548387	4.36451	0.24

Manufacturing Oberhead for the new bid will look like as below:

	Cutting	Machining	Assembly	Total
Direct Labor	6400	1600	12900	20900
Manufacturing Overhead rate	1.693548387	4.364507	0.24
Manufacturing Overhead to be allocated	10838.70968	6983.211	3096	20917.92
Single Manufacturing Overhead rate				1.000857

Company has calcuted the bid price assuming overhead rate of 1.68 while the rate for new order should have been 1.000857 .