FALL 2021/2022-CASE 1 Suhad, owner and manager of Suhad Decoration, has been receiving some complaints from her clients. For example, one of her loyal customers, Zeina, wanted to know why she was being charged a much higher price for an order that was almost identical to an order she placed last year. Zeina felt that the price hike was simply not justified. Although Suhad, when responding to Zeina's complaint, blamed the price hike on the rising price of materials, she herself was a bit perplexed and decided to look into the matter. Suhad asked her accountant to prepare a report for her summarizing cost and pricing data for the last 3 years. The accountant presented this information in the following table: Year 1 Year 2 Year Iudget Results Revenue Direct materials Direct labor Variable factory overhead Fixed variable overhead Variable selling and administrative expenses Fixed selling and administrative expenses $2.400,000||$2,700,000 $2,000,000 360,000 405.000 320.000 720,000 S10,000 650,000 144,000 16200 130,000 400,000 400,000 4000 240,000 200,000 300,000 180,000 220,000 200,000 Actual Results Revenue Direct materials Direct labor Variable factory overhead Fixed variable overhead Variable selling and administrative expenses Fixed selling and administrative expenses 52.320.000 12.800.000 180,000 430,000 725,000 900,000 140,00 100 425.00 440,000 260,000 200,000 180,000 | 200.000 Suhad believes that the last few years have been fairly representative of business volume in general. Moreover, Suhad believes the average of the direct labor cost for years 1 and 2 is a fair estimate of her "normal" volume of business. Suhad next turns her attention to how she prices incoming jobs. When her company receives an order, Suhad estimates the direct labor and material costs for the job, and then she applies an overhead amount to the job. Each year, the firm computes a budgeted overhead rate per dollar of direct labor. The company then prepares the order quote by adding direct material costs, direct labor costs, and applied overhead, and a 50% markup on total cost. Suhad retrieves information corresponding to Zeina's order in year 2 and compares it with the price quote the company prepared for Zeina for the most recent order in year 3. Suhad is not an accountant, but she is a good manager and can understand why Zeina complained. 52320 SOLO Actual Results Kev Direct materials Det er Variable factory overhead Fixed variable overhead Variable selling and administrative expres Fored selling and administrative expenses 30,000 900.000 10 4. 10000 2000 . 180,00 200.000 Suhad believes that the last few years have been fairly representative of business volume in general. Moreover, Suhad believes the average of the direct labor cost for years 1 and 2 is a fair estimate of her "normal" volume of business. Suhad next turns her attention to how she prices incoming jobs. When her company receives an order, Suhad estimates the direct labor and material costs for the job, and then she applies an overhead amount to the job. Each year, the firm computes a budgeted overhead rate per dollar of direct labor. The company then prepares the order quote by adding direct material costs, direct labor costs, and applied overhead, and a 50% markup on total cost. Suhad retrieves information corresponding to Zeina's order in year 2 and compares it with the price quote the company prepared for Zeina for the most recent order in year 3. Suhad is not an accountant, but she is a good manager and can understand why Zeina complained. Required: 1. Compute the total overhead application rates for years 1, 2, and 3. order. Direct materials ISIS. ISIS. Det er 2. Compute the overapplied or underapplied overhead for year 1 and year 2. 3. The following information pertains to Zeina's order in year 2, and her current order for year 3. which is identical to year 2 Vicar Year 3 T1530,000 13.00 Compute the price charged for the year 2 order and the price quoted for the year 3 order. 4. Do you agree with Zeina that the price being quoted for her year 3 order is too high? 5. What should Suhad do? Can you suggest an alternative way for Suhad to develop her price quotes? Explain
