"Don't tell me we've lost another bid!" exclaimed Janice Hudson, president of Prime Products Inc. "I'm afraid so," replied Doug Martin, the operations vice-president. "One of our competitors underbid us by about $10,000 on the Hastings job." "I just can't figure it out," said Hudson. "It seems we're either too high to get the job or too low to make any money on half the jobs we bid. What's happened?"
Prime 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 labour cost. The following estimates were made at the beginning of the year:
| |
Department |
|
|
Cutting |
Machining |
Assembly
|
|
Total Plant
|
|
Direct labour.............................................
|
$300.000
|
$20Q000
|
$400,000
|
$900,030
|
|
Manufacturing oierhead...........................
|
55I0,000
|
$800,000
|
$100,000
|
$1,440,000
|
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:
|
|
Cutting
|
Machining
|
Assembly
|
Total Plant
|
|
Direct material...............................
|
S12.000
|
5900
|
$5,600
|
$18,500
|
|
Direct labour............................
|
$6,500
|
$1,700
|
513,000
|
$21,200
|
|
Manufacturing oierhead ...............
|
|
?
|
?
|
|
The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.
Required:
1. Assuming the use of a plantwide overhead rate:
1. Compute the rate for the current year.
2. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.
2. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:
1. Compute the rate for each department for the current year.
2. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.
3. Explain the difference between the manufacturing overhead that would have been applied to the Hastings job using the plantwide rate in 1(b) above and using the departmental rates in 2(b).
4. Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost