eBook Plantwide Overhead Rate versus Departmental Rates, Effects on Pricing Decisions Cherise Ortega, marketing manager for Romer Company, was puzzled by the outcome of two recent bids. The company's policy was to bid 150 percent of the full manufacturing cost. One job (labeled Job 97-28) had been turned down by a prospective customer, who had indicated that the proposed price was $3 per unit higher than the winning bid. A second job (Job 97-35) had been accepted by a customer, who was amazed that Romer could offer such favorable terms. This customer revealed that Romer's price was $43 per unit lower than the next lowest bid. Cherise has been informed that the company was more than competitive in terms of cost control. Accordingly, she began to suspect that the problem was related to cost assignment procedures. Upon investigating, Cherise was told that the company uses a plantwide overhead rate based on direct labor hours. The rate is computed at the beginning of the year using budgeted data. Selected budgeted data are given below. Department A Department B Total Overhead $500,000 $2,000,000 $2,500,000 Direct labor hours 200,000 50,000 250,000 Machine hours 20,000 100,000 120,000 Cherise also discovered that the overhead costs in Department B were higher than those in Department A because B has more equipment, higher maintenance, higher power consumption, higher depreciation, and higher setup costs. In addition to the general procedures for assigning overhead costs, Cherise was supplied with the following specific manufacturing data on Jobs 97-28 and 97-35: Job 97-28 Department A Department B Total Direct labor hours 5,000 1,000 6,000 Machine hours 200 400 600 Check My Work