AC 212 Lecture Notes - Lecture 2: Contribution Margin, Fixed Cost, Variable Cost
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âBlast it!â said David Wilson, president of Teledex Company.âWeâve just lost the bid on the Koopers job by $4,000. It seemsweâre either too high to get the job or too low to make any moneyon half the jobs we bid.â |
Teledex Company manufactures products to customersâspecifications and operates a job order costing system.Manufacturing overhead cost is applied to jobs on the basis ofdirect labor cost. The following estimates were made at thebeginning of the year: |
Department | ||||||||
Fabricating | Machining | Assembly | Total Plant | |||||
Direct labor | $ | 210,000 | $ | 105,000 | $ | 315,000 | $ | 630,000 |
Manufacturingoverhead | $ | 367,500 | $ | 420,000 | $ | 94,500 | $ | 882,000 |
Jobs require varying amounts of work in the three departments.The Koopers job, for example, |
Department | ||||||||
Fabricating | Machining | Assembly | Total Plant | |||||
Directmaterials | $ | 4,000 | $ | 300 | $ | 2,400 | $ | 6,700 |
Direct labor | $ | 4,800 | $ | 600 | $ | 7,200 | $ | 12,600 |
Manufacturingoverhead | ? | ? | ? | ? | ||||
The company uses a plantwideoverhead rate to apply manufacturing overhead cost to jobs. |
Required: | |
1. | Assuming use of a plantwideoverhead rate: |
a. | Compute the rate for the current year. |
b. | Determine the amount of manufacturing overhead cost that wouldhave been applied to |
2. | Suppose that instead of using a plantwide overhead rate, thecompany had used a separate predetermined overhead rate in eachdepartment. Under these conditions: |
a. | Compute the rate for eachdepartment for the current year. |
b. | Determine the amount of manufacturing overhead cost that wouldhave been applied to |
4. | Assume that it is customary in the industry to bid jobs at 150%of total manufacturing cost (direct materials, direct labor, andapplied overhead). |
a. | What was the company's bid price on the Koopers job if aplantwide overhead rate had been used to apply overhead cost? |
b. | What would the bid price have been if departmental overheadrates had been used to apply overhead cost? |
5. | At the end of the year, the company assembled the followingactual cost data relating to all jobs worked on during theyear. |
Department | ||||||||
Fabricating | Machining | Assembly | Total plant | |||||
Directmaterials | $ | 200,000 | $ | 17,000 | $ | 124,000 | $ | 341,000 |
Direct labor | 220,000 | 118,000 | 272,000 | 610,000 | ||||
Manufacturingoverhead | $ | 377,000 | $ | 440,000 | $ | 85,900 | $ | 902,900 |
a. | Compute the underapplied or overapplied overhead for the year,assuming that a plantwide overhead rate is used. |
b. | Compute the underapplied or overapplied overhead for the year,assuming that departmental overhead rates are used. (Enteroverapplied overhead costs as negative amounts and underappliedoverhead costs as positive amounts.) |
Lettuce Serve manufactures a variety of specialty salad dressings. Production runs are both high-volume and low-volume activities, depending on customer orders. Presented is Lettuce Serve's 2017 general manufacturing costs (manufacturing overhead) and each cost's related activity cost driver.
Level | Total Cost | Units of Cost Driver | |
---|---|---|---|
Unit | $ 500,000 | 10,000 machine hours | |
Batch | 50,000 | 500 customer orders | |
Product | 100,000 | 25 products |
Their cranberry vinaigrette dressing required 3,000 machine hours to fill 10 customer orders for a total of 8,000 units.
(a) Assuming all manufacturing overhead is estimated and predicted on the basis of machine hours, determine the predicted total overhead costs to produce the 8,000 units of cranberry vinaigrette.
$Answer
(b) Assuming manufacturing overhead is estimated and predicted using separate rates for machine hours, customer orders, and products (a multiple-level cost hierarchy), determine the predicted total overhead costs to produce the 8,000 units of cranberry vinaigrette.
$Answer
(c) Calculate the error in predicting manufacturing overhead using machine hours versus using multiple cost drivers. Indicate whether the use of only machine hours results in overpredicting or underpredicting the costs to produce 8,000 units of cranberry vinaigrette.
$Answer
AnswerOver-predictionUnder-prediction
(d) Determine the error in the prediction of cranberry vinaigrette batch-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the batch-level costs of cranberry vinaigrette.
$Answer
AnswerOver-predictionUnder-prediction
(e) Determine the error in the prediction of cranberry vinaigrette product-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the product-level costs of cranberry vinaigrette.
$Answer
Answer