Problem:
Madison Company manufactures its only product using a single machine that has the capacity to operate 2,000 machine hours a year. This machine is rented at an annual cost of $100,000 and is the company's only manufacturing overhead cost. Madison's product is produced in batches based on customer orders, and the cost of each batch is determined using a job-order costing system with machine hours used to allocate manufacturing overhead cost. The company adds a 20% markup over cost (and rounds to the nearest dollar) to determine the price to the customer. Because of fluctuations in expected demand, the number of machine hours expected to be used each year often changes significantly. The sales department has complained that this results in large changes in product costs and therefore pricing. The controller has suggested using the capacity method to apply overhead as a way to prevent this from happening. At the beginning of this year, it was estimated that 1,724 machine hours would be required for expected orders.
The accounting department is determining the cost for Job 64B below:
- Actual Direct Material : $1,025
- Actual Direct Labor : $250
- Actual Machine Hours Used : 8
Required:
Question: If Madison uses the capacity method, by how much will the price increase or decrease for Job 64B compared to the price determined using the traditional method?
- $64 decrease
- $64 increase
- $77 decrease
- $77 increase
- None
Note: Be sure to show how you arrived at your answer.