Bob Morden, Treasure Trophy Company's new general manager, was about to set the selling prices for an order from the Royal Golf Club. The club had requested quotes before deciding on their purchase. Morden wondered what his own company's (i.e., the manufacturer's) costs were for filling the order so that he could provide a competitive quote on the order. Treasure Trophy Company (Treasure) manufactured trophies for all kinds of sports, businesses and celebratory events. All trophies were made to order, sometimes for retail stores and sometimes directly for the organizers of the events. Several trophy manufacturers competed for this business, and since their capabilities were about the same, prices were set with reference to a fairly narrow competitive range. Treasure used a job order system of cost accumulation. The company did not use a standard cost system since its products were all customized. The manufacturing process was divided into three departments: forming, finishing and assembly. The raw materials were machined to make up finished parts in the forming department. In the finishing department, these parts were sanded, polished, lacquered or subjected to whatever other finishing operations the job required. Any engraving was done in the finishing department. The assembly operation involved joining parts together to form the trophy, which most commonly meant gluing. Decals might also be glued onto trophies in the finishing department, particularly in the case of less expensive trophies that had little or no engraving. The company's budgeted costs for the year 2014 are shown in Exhibiti. A single supervisor oversaw all three departments. His responsibilities included scheduling orders, ensuring that schedules were met, and verifying that trophies were produced to specifications. The costs shown for shipping did not include any allocation of rent or light and heat. The entire factory building was rented. It had a floor area of 15,000 square feet. The forming department contained 4,000 square feet; the finishing and assembly departments each occupied 3,000 square feet, and the remainder of the building was used for offices, material storage, and shipping and receiving. The forming department had two machines, each rated at 15 horsepower, and the finishing department had two 10-horsepower machines. All work in the assembly department was done by hand. The machines in the forming department had originally cost $360,000, and the ones in the finishing department had cost $240,000. All machinery was depreciated over 10 years using the straight-line method with no estimated residual value. Insurance expense was calculated based on the historical cost of the machines. The best estimate for repairs expenses was based on the proportionate horsepower of the machines. No supplies were required for the forming department since all the material used was considered a direct material cost. Supplies expenses were roughly equal for the finishing and assembly departments. A job cost sheet was prepared by the supervisor for every order processed by the company. Exhibit 2 contains an incomplete job cost sheet for Job Order No. 35, which required 80 golfing trophies. The budgeted direct labour cost of $210,000 was made up of $56,000 for the forming department, $84,000 for the finishing department, and $70,000 for the assembly department. Exhibit 3 contains a cost assignment and allocation worksheet, which had recently been designed by the supervisor. Morden sat down to set a price for the Royal Golf Club order. To begin with, he wondered what Treasure's costs were for filling the order. As well, he was concerned about what factors should be taken into account in the pricing process and what price should be quoted on the order. EXHIBIT 1: BUDGETED COSTS FOR 2014 Direct labour Direct material Supervision General manager's salary Supplies Shipping! Power Rent Light and heat Depreciation on machinery Insurance on machinery Repairs Selling expenses Administrative expenses $ 210,000 140,000 51,500 105,000 42,000 30,000 13,500 54,000 18.000 60,000 6,000 6,500 70,000 33,500 EXHIBIT 2: JOB COST SHEET Treasure Trophy Company Date: April 6, 2014 Customer: Royal Golf Club Box 11258 Carstairs, Alberta Order No. 3515 Job Order No.: 35 No. of Units: 80 Department Material Cost Hours Labour Rate Labour Cost Overhead Applied Total $ 301.00 Forming Finishing Assembly Total 10.0 15.0 10.0 35.0 $ 14.00 21.00 17.50 $ 140.00 315.00 175.00 $ 630.00 $ 301.00 Includes costs for shipping finished goods to customers only. EXHIBIT 3: ANNUAL COST ASSIGNMENT AND ALLOCATION WORKSHEET Total Forming Finishing Assembly Direct Costs Direct labour Direct material Total direct costs $ 210,000 140,000 350,000 Factory Overhead Costs Supervision Supplies Power Rent Light and heat Depreciation, machinery Insurance, machinery Repairs Total factory overhead costs 51.500 42,000 13,500 36,000 12.000 60,000 6.000 6,500 227,500 Administrative Costs General manager's salary Shipping Rent Light and heat Selling expenses Administrative expenses Total administrative expenses Overhead Application Rates Factory overhead application rate (FOH expenses - Direct labour) 105.000 30,000 18,000 6,000 70,000 33.500 262.500 Total overhead application rate (Total expenses Direct labour) 1. Allocate manufacturing overhead to departments. Specific overhead items should be allocated on an individual basis when there is a logical basis for doing so. 2. Develop overhead application rates for the three departments on the basis of direct labor cost. 3. Complete the job cost sheet shown in case Exhibit 2 in order to get the total cost for the job based on the full costing method. 4. Calculate the cost of each of the two jobs using the direct costing method. 5. As Bob Morden, what factors would you consider before setting a firm quote for these two orders? 6. What price should Treasure Trophy Company be willing to quote for the Royal Golf Club