Question

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $2,000. 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 uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year: Department Fabricating Machining Assembly Total Plant Manufacturing overhead $ 353,500 $ 404,000 $ 90,900 $ 848,400 Direct labor $ 202,000 $ 101,000 $ 303,000 $ 606,000 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 $ 3,200 $ 200 $ 1,600 $ 5,000 Direct labor $ 3,200 $ 500 $ 6,400 $ 10,100 Manufacturing overhead ? ? ? ? Required: 1. Using the company's plantwide approach: a. Compute the plantwide predetermined rate for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job. 2. Suppose that instead of using a plantwide predetermined overhead rate, the company had used departmental predetermined overhead rates based on direct labor cost. Under these conditions: a.Compute the predetermined overhead rate for each department for the current year.

Answer 1

Solution 1- a.:

Plantwide predetermined overhead rate = Total Manufacturing Overhead cost / Total direct labor costs

= $848,400 / $606000 = 140%

Solution 1-b:

Manufacturing overhead cost applied to the Koopers job =Total Direct Labor cost in kapoor's job * Plantwide predetermined overhead rate

= $10100 *140% = $14,140

Solution 2- a:

Computation of Departmental Predetermined overvead rate
Department	Manufacturing Overhead	Direct Labor Cost	Overhead Rate
Fabricating	353500	202000	175%
Machining	404000	101000	400%
Assembly	90900	303000	30%
Total	848400	606000