Case 4-25 (continued)
However, use of a plantwide overhead rate in effect redistributes
overhead costs proportionately between the three departments (at
160% of direct labor cost) and results in a large amount of overhead
cost being charged to the Hastings job, as shown in Part 1. This may
labor in the Cutting or Machining Departments. The reason is that the
plantwide overhead rate (160%) is much lower than the rates if these
departments were considered separately.
4. The company’s bid price was:
Direct materials ……………………………………….
$ 18,500
Direct labor …………………………………………….
21,200
Manufacturing overhead applied (above) ………
33,920
Total manufacturing cost …………………………..
73,620
Bidding rate ……………………………………………
× 1.5
Total bid price …………………………………………
$110,430
If departmental overhead rates had been used, the bid price would have
been:
Direct materials ……………………………………….
$ 18,500
Direct labor …………………………………………….
21,200
Manufacturing overhead applied (above) ………
21,750
Total manufacturing cost …………………………..
61,450
Bidding rate ……………………………………………
× 1.5
Total bid price …………………………………………
$ 92,175
Note that if departmental overhead rates had been used, Lenko
Products would have been the low bidder on the Hastings job since the
competitor underbid Lenko by only $10,000.
Case 4-25 (continued)
5. a.
Actual overhead cost …………………………………
$1,482,000
Applied overhead cost ($870,000 × 160%) …….
1,392,000
Underapplied overhead cost ………………………..
$ 90,000
b.
Department
Cutting
Machining
Assembly
Total Plant
Actual overhead cost …………
$560,000
$830,000
$92,000
$1,482,000
Applied overhead cost:
$320,000 × 180% ………….
576,000
$210,000 × 400% ………….
840,000
$340,000 × 25% ……………
85,000
1,501,000
Underapplied (overapplied)
overhead cost ……………….
$(16,000)
$(10,000)
$ 7,000
$ (19,000)
Case 4-27 (continued)
4. While it may have been a good idea to acquire the new equipment
because of its greater capabilities, the calculations of the cost savings
were in error. The original calculations implicitly assumed that overhead
would decrease because of the reduction in direct labor-hours. In
Cost consequences of leasing the automated equipment:
Increase in manufacturing overhead cost:
Lease cost of the new machine …………………………….
$300,000
Cost of new technician/programmer ………………………
45,000
345,000
Deduct: labor cost savings (2,000 hours × $30 per
hour) .……………………………………………………………..
60,000
Net increase in annual costs ……………………………..……
$285,000
Even if the entire 6,000-hour reduction in direct labor-hours occurred,
that would have added only $120,000 (4,000 hours × $30 per hour) in
cost savings. The net increase in annual costs would have been
$165,000 and the machine would still be an unattractive proposal. The
entire 6,000-hour reduction may ultimately be realized as workers retire
or quit. However, this is by no means automatic.
There are two morals to this tale. First, predetermined overhead rates
reduce the direct labor force and may be virtually impossible in some
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182 Managerial Accounting for Managers, 3rd Edition
Exercise 4A-1 (30 minutes)
1. There were no beginning or ending inventories, so all of the jobs were
started, finished, and sold during the month. Therefore cost of goods
sold equals the total manufacturing cost. We can verify that by
Manufacturing costs charged to jobs:
Add: Beginning work in process inventory ……..
shown below:
Manufacturing overhead incurred …………………………………
$10,870
Manufacturing overhead applied ($74 hour × 124 hours) ….
9,176
Overhead underapplied………………………………………………
$ 1,694
