Question

“Don’t tell me we have lost another bid!” exclaimed Roha, president of Rohami Sdn Bhd. “I’m afraid so,” replied Ramy, the operation vice president. “One of our competitors underbid us by about RM10,000 on the RR2 job.” “I just can’t figure it out,” said Roha. “It seems we are either too high to get the job or too low to make any money on half the jobs we bid any more. What’s happened?”

Roha Sdn Bhd 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	RM300,000	RM200,000	RM400,000	RM900,000
Manufacturing overhead	RM540,000	RM800,000	RM100,000	RM1,440,000

  

Jobs require varying amounts of work in the three departments. The RR2 job, for example, would have required manufacturing costs in the three departments as follows:

	Department
	Cutting	Machining	Assembly	Total Plant
Direct materials	RM12,000	RM900	RM5,600	RM18,500
Direct labor	RM6,500	RM1,700	RM13,000	RM21,200
Manufacturing overhead	?	?	?	?

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

REQUIRED:

(a) Assuming use of a plantwide overhead rate:

(i) Compute the rate for the current year.

(ii) Determine the amount of manufacturing overhead cost that would have been applied to the RR2 job.

(b) Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:

(i) Compute the rate for each department for the current year.

(ii) Determine the amount of manufacturing overhead cost that would have been applied to the RR2 job.

(c) Explain the difference between the manufacturing overhead that would have been applied to RR2 job using the plantwide rate in part (a) (ii) above and using the departmental rates in part (b) (ii).

(d) Assume that it is necessary in the industry to bid jobs at 150% of total manufacturing cost. What was the company’s bid price on the RR2 job if a plantwide overhead rate is used? What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

(e) 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	RM760,000	RM90,000	RM410,000	RM1,260,000
Direct labor	RM320,000	RM210,000	RM340,000	RM870,000
Manufacturing overhead	RM560,000	RM830,000	RM92,000	RM1,482,000

Compute the underapplied or overapplied overhead for the year:

1. Assuming that a plantwide overhead rate is used.
2. Assuming that departmental overhead rates are used.

Answer 1

a) Using plantwide overhead rate

Overhead Recovery Rate = Manufacturing Overhead/ total direct labour

Overhead Recovery Rate = 1440,000/900,000 = $1.6 per labour hour

RR2 Job Costing	Machining	Machining	Assembly	Total
Direct Material	12,000	900	5,600	18,500
Direct Labour	6,500	1,700	13,000	21,200
Mfg Ovhs ($1.6* Direct labour)	10,400	2,720	20,800	33,920
Total Cost	28,900	5,320	39,400	73,620

b)

Pre-determined overhead rate in each department
	Machining	Machining	Assembly	Total
Direct Labour (A)	300,000	200,000	400,000	900,000
Manufacturing Overhead (B)	540,000	800,000	100,000	1,440,000
Overhead recovery rate (B/A)	1.80	4.00	0.25

RR2 Job Costing	Machining	Machining	Assembly	Total
Direct Material	12,000	900	5,600	18,500
Direct Labour	6,500	1,700	13,000	21,200
Mfg Ovhs (Rate* Direct labour)	11,700	6,800	3,250	21,750
Total Cost	30,200	9,400	21,850	61,450

C)

Differnce in between Mfg Ovhs	(1,300)	(4,080)	17,550	12,170
	(10400-11700)	(2720-6800)	(20800-3250)

D)

Bid Price = 150% of total cost
	Total Cost	Bid Price
Using plantwide overhead rate	73,620	110,430
Pre-determined ovh rate in each dept	61,450	92,175

E)

Using plantwide overhead rate	Budgeted	Actual	Variance -Over/(under)
	Machining	Machining	Assembly	Total	Machining	Machining	Assembly	Total	Machining	Machining	Assembly	Total
Direct Labour	300,000	200,000	400,000	900,000	320,000	210,000	340,000	870,000	(20,000)	(10,000)	60,000	30,000
Mfg Ovhs ($1.6* Direct labour)	480,000	320,000	640,000	1,440,000	560,000	830,000	92,000	1,482,000	(80,000)	(510,000)	548,000	(42,000)
Total Cost	780,000	520,000	1,040,000	2,340,000	880,000	1,040,000	432,000	2,352,000	(100,000)	(520,000)	608,000	(12,000)

Pre-determined ovh rate in each dept	Budgeted	Actual	Variance -Over/(under)
	Machining	Machining	Assembly	Total	Machining	Machining	Assembly	Total	Machining	Machining	Assembly	Total
Direct Labour	300,000	200,000	400,000	900,000	320,000	210,000	340,000	870,000	(20,000)	(10,000)	60,000	30,000
Manufacturing Overhead	540,000	800,000	100,000	1,440,000	560,000	830,000	92,000	1,482,000	(20,000)	(30,000)	8,000	(42,000)
Total Cost	840,000	1,000,000	500,000	2,340,000	880,000	1,040,000	432,000	2,352,000	(40,000)	(40,000)	68,000	(12,000)