Massachusetts Technology Inc. (MTI) has a diverse product line. Some jobs require much labor and little machine use, and others require the opposite mix. Because no single base for a predetermined overhead rate provides MTI management with reliable product cost information, factory overhead is classified into two cost pools, and two predetermined overhead rates are used. For the year 20A, it is estimated that total factory overhead costs will consist of $400,000 of overhead related to the usage of direct labor hours and $600,000 of overhead related to machine usage. Total machine usage is expected to be 20,000 hours for the year, and total direct labor hours are expected to be 16,000 hours.
Job 564, which was completed early in the year 20A, required $2,000 of direct materials, 30 hours of labor at $10 per hour, and 10 hours of machine time. Job 632 required $2,000 of direct material, 30 hours of labor at $10 per hour, and 60 hours of machine time.
Required:
(1) Calculate MTI's predetermined overhead rates for the year 20A.
(2) Determine the total cost of Job 564.
(3) Determine the total cost of Job 632.
(4) If MTI had used a single predetermined overhead rate based on direct labor hours to apply all factory overhead costs, then:
(a) What would the predetermined rate be?
(b) What would be reported as the total cost of Job 564?
(c) What would be reported as the total cost of Job 632?
(5) Compare the two total cost amounts for Job 564 calculated in requirement 2 and requirement 4b. Compare the total cost amount for Job 632 calculated in requirement 3 with that of requirement 4c. What are the competitive implications of using the single predetermined overhead rate and quoting prices at cost plus a small markup?