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.

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).

a. What was the company's bid price on the Hastings job if the 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?

Answer 1

Predetermined Overhead Rate :-

= Estimated Total Manufacturing Overhead Cost / Estimated Total amount of the allocation base

= $1550640 / $923000

= 168%

Overhead Applied = $20900 * 168% = $35112

Departmental Overhead Rate :-

Particulars	Cutting	Machining	Assembly
Estimated Manuf. overhead cost (A)	525000	929640	96000
Estimated direct labor cost (B)	310000	213000	400000
Predetermined Overhead Rate (A/B)*100	169%	436%	24%

Overhead Applied :-

Cutting = $6400 * 169% = $10816

Machining = $1600 * 436% = $6976

Assembly = $12900 * 24% = $3096

Total Overhead Applied = $10816+$6976+$3096 = $20888

4a) . Calculation for Bid Price (as per plant wide overhead rate) :-

Total Manufacturing Cost = $18400 + $20900 + $35112 = $74412

Bid Price = $74412 * 150% = $111618

4b) . Calculation for Bid Price (as per Departmental overhead rate) :-

Total Manufacturing Cost = $18400 + $20900 + $20888 = $60188

Bid Price = $60188 * 150% = $90282