ACC 312 Midterm: Overhead Rates

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greenwalrus59

13 Nov 2017

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Multiple predetermined overhead rates: the chapter discussion assumes that there is a single predetermined overhead rate for an entire factory called a plantwide overhead rate, in larger companies, multiple predetermined overhead rates are often used. For example, each production department may have its own predetermined overhead rate: while using multiple predetermined overhead rates is more complex, it is also more accurate because it reflects differences across departments in how overhead costs are incurred. Job-order costing in services companies: although our attention has focused on manufacturing applications, it bears re-emphasizing that job-order costing is also used in services industries, for example, in a law firm, ea(cid:272)h (cid:272)lient represents a (cid:862)jo(cid:271). (cid:863) Legal forms and similar inputs represent direct materials. The time expended by attorneys represents direct labor. The costs of secretaries, clerks, rent, depreciation, and so forth, represent the overhead. The documents used and the flow of costs in job-order costing: materials requisition form, direct labor time ticket.

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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,
would have required manufacturing costs in the three departments asfollows:

	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 the Koopers job.

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 the Koopers job.

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.)

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Kelvin Aerospace, Inc., manufactures parts such as rudder hinges for the aerospace industry. The company uses a job- order costing system with a predetermined plantwide overhead rate based on direct labor hours. On December 10, 2017, the companyâs controller made a preliminary estimate of the predetermined overhead rate for the year 2018. The new rate was $75 per direct labor hour, based on the estimated total manufacturing overhead cost of $3,750,000 ($3,250,000 fixed; $500,000 variable) and the estimated 50,000 total direct labor hours for 2018. This new predetermined overhead rate was communicated to top managers in a meeting on December 20. The rate did not cause any comment because it was within a few pennies of the overhead rate that had been used during 2017. One of the subjects discussed at the meeting was a proposal by the production manager to lease an automated milling machine built by Sunghi Industries. The president of Kelvin Aerospace, Harry Arcany, agreed to meet with the sales representative from Sunghi Industries to discuss the proposal. On the day following the meeting, Mr. Arcany met with Jasmine Chang, Sunghi Industriesâ sales representative. The following discussion took place:

Arcany: Wally, our production manager, asked me to meet with you because he is interested in installing an automated milling machine. Frankly, Iâm skeptical. Youâre going to have to show me this isnât just another expensive toy for Wallyâs people to play with.

Chang: This is a great machine with direct bottom-line benefits. The automated milling machine has three major advantages. First, it is much faster than the manual methods you are using. It can process about twice as many parts per hour as your present milling machines. Second, it is much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required to run a standard operation. You just punch in the code for the standard operation, load the machineâs hopper with raw material, and the machine does the rest.

Arcany: What about cost? Having twice the capacity in the milling machine area wonât do us much good. That center is idle much of the time anyway.

Chang: I was getting there. The third advantage of the automated milling machine is lower cost. Wally and I looked over your present operations, and we estimated that the automated equipment would eliminate the need for about 12,000 direct labor hours a year. What is your direct labor cost per hour?

Arcany: The wage rate in the milling area averages about $30 per hour. Fringe benefits raise that figure to about $40 per hour.

Chang: Donât forget your overhead.

Arcany: Next year the overhead rate will be $75 per hour.

Chang: So including fringe benefits and overhead, the cost per direct labor hour is about $115.

Arcany: Thatâs right.

Chang: Since you can save 12,000 direct labor hours per year, the cost savings would amount to about $1,380,000 a year. And our 60-month lease plan would require payments of only $500,000 per year.

Shortly after this meeting, Mr. Arcany asked the companyâs controller for a recommendation on whether the new machine should be leased. The controller realized that if the machine is leased a recomputation of the overhead rate for the year 2018 would be required because the decision would affect both the manufacturing overhead and the direct labor hours for the year. After talking with both the production manager and the sales representative from Sunghi Industries, the controller discovered that in addition to the annual lease cost of $500,000, the new machine would also require a skilled technician/programmer who would have to be hired at a cost of $70,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. The controller assumed that the new machine would result in a reduction of 12,000 direct labor hours for the year from the levels that had initially been planned. The reduction in direct labor hours is expected to mainly result from attrition, but some layoffs would likely be necessary. When the revised predetermined overhead rate for the year 2018 was circulated among the companyâs top managers, there was considerable dismay.

Required:
Provide a recommendation as to whether the lease of the new machine should be approved and show how you came to the conclusion.

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ACC 312 Midterm: Overhead Rates

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