Plantwide versus Departmental Overhead Rates; Underapplied or Overapplied Overhead

“Don’t tell me we’ve lost another bid!” exclaimed Sandy Kovallas, president of Lenko   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 Kovallas. “It seems we’re either too high to get the job or too low to make any money on half the jobs we bid anymore. What’s happened?”

Lenko 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 labor cost. The following estimates were made at the beginning of the year:

 

		Department
	Cutting	Machining	Assembly	Total Plant
Direct labor . . . . . . . . . . . . . . . . .	$300,000	$200,000	$400,000	$900,000
Manufacturing overhead . . . . . . .	$540,000	$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:

 

 

		Department
	Cutting	Machining	Assembly	Total Plant
Direct materials . . . . . . . . . . .   .	$12,000	$900	$5,600	$18,500
Direct labor . . . . . . . . . . . . . . . . . Manufacturing overhead . . . . . . .	$6,500 ?	$1,700 ?	$13,000 ?	$21,200 ?

 

The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.

Required:

1.       Assuming the use of a plantwide overhead rate:

a.       Compute the rate for the current year.

b.       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:

a.       Compute the rate for each department for the current year.

b.       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 question 1(b) and using the departmental rates in question 2(b).

 

4.       Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labor, and applied overhead). What was the company’s bid price on the Hastings job? What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

5.       At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year:

 

		Department
	Cutting	Machining	Assembly	Total Plant
Direct materials. . . . . . . . . . . . . . . . .	$760,000	$90,000	$410,000	$1,260,000
Direct labor . . . . . . . . . . . . . . . . . . . .	$320,000	$210,000	$340,000	$870,000
Manufacturing overhead. . . . . . . . . .	$560,000	$830,000	$92,000	$1,482,000

 

Compute the underapplied or overapplied overhead for the year (a) assuming that a plantwide overhead rate is used, and (b) assuming that departmental overhead rates are used.