CASE 2 Plantwide versus Departmental Overhead Rates; Pricing LO2–1, LO2–2, LO2–3, LO2-4

“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $2,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.”

Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year:

Department Fabricating Machining Assembly Total Plant

$350,000 $400,000 $90,000 $840,000

. . $200,000 $100,000 $300,000 $600,000 Jobs require varying amounts of work in the three departments. The Koopers job, for example, would have required manufacturing costs in the three departments as follows:

Department Fabricating Machining Assembly Total Plant

$3,000 $200 $1,400 $4,600

. . $2,800 $500 $6,200 $9,500

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Required:

1. Using the company’s plantwide approach:

a. Compute the plantwide predetermined rate for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.
2. Suppose that instead of using a plantwide predetermined overhead rate, the company had used departmental predetermined overhead rates based on direct labor cost. Under these conditions:

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

b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.
3. Explain the difference between the manufacturing overhead that would have been applied to the Koopers job using the plantwide approach in question 1

(b) and using the departmental approach 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 Koopers job using a plantwide predetermined overhead rate? What would have been the bid price if departmental predetermined overhead rates were used to apply overhead cost?