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Little Bob's Custom Tables produces expensive custom tables with intricate inlay. The primary customers of the firm are wealthy individuals and corporations that want large fancy tables for their Board Room. Little Bob's uses a job order costing system to determine product cost in its labor-intensive manufacturing facility. The company has two cost pools - materials handling overhead (MHOH) and production overhead (POH). Little Bob has decided to use budgeted direct materials cost as the allocation base for MHOH and budgeted direct labor cost to aflocate POH. 1. Calculate the predetermined overhead rate for Materials Handling Overhead per year: 2. Calculate the predetermined overhead rate for Production Overhead per year: Two possible customers have approached Little Bob's for custom tables - Intel Corporation and the Emir of Burundi. Based on the specifications, the company estimator estimates that Intel's table will have $37,000 direct materials cost and $18,000 direct labor costs. The estimator estimates that the Emir's table $10,000 and $17,000 for direct materials and direct labor, respectively. Using the predetermined overhead rates above, calculate the standard cost for each of the tables. (Note that sales price is ultimately 150% of standard cost.) 3. The cost for Intel's Table: 4. The cost for the Emir's Table: 5. What will happen if the overhead allocation was wrong and the products are over priced? Underpriced? 1. Disregarding the costs allocated to a flushing day, production overhead is allocated based upon the number of pens produced each month. What is the predetermined production overhead application rate per pen? 2. Assume that monthly flushing costs are treated as flushing overhead and is allocated based on the total number of pens produced a month. What is the predetermined flushing overhead application rate per pen? 3. What does it cost the company to produce the 120,000 blue pens a month? Take into account all direct costs and indirect costs. What is the gross margin for the 120,000 blue pens sold a month? Note: Blue pens are sold for $1.25 a piece. 5. Now assume that all the costs from one day of flushing is allocated to the black pens and one day of flushing is allocated to the blue pens. What does it cost the company to produce the 120,000 blue pens a month? 6. Taking \#5 (above) into account, what is the gross margin for blue pens, if all blue pens are sold for $1.25 a piece? 7. Which allocation method of the flushing costs, per pen or one day of flushing costs, do you think should be used to allocate the flushing costs to pens? Explain and support your answer. 8. What are some changes Smooth-Line can do immediately to save itself money on producing pens? Explain and support your answer. Overhead Cost Allocation Aetivity Process Costing Big Bob's Old-Fashioned Fumiture produces two products in the same manufacturing facility. The company has two cost pools - materials handling overhesd (MHOH) and production overhead (POH). Company management has decided to use the number of pieces of wood used as the allocation base for MHOH and direct labor hours to allocate POH. Big Bob's makes pedestal tables and chairs. The facts for each item produced are given below. 1. If materials overhead is allocated based on the total sumber of pieces of wood, what is the predetermined overhead application rate per piece of wood for materials handling overhead? 2. If production overhead is allocated based on the total number of labor hours, what is the predetermined overhead application rate per labor hour for production overhead? 3. What is the cost to produce a table? 4. What is the cost to produce a chair? Smooth Line Pen \& Ink (pg. 1/3) Cost Allocations Smooth Line Pen \& Ink Company produces ink pens. The pens come in two styles, Orie is a typical tubular pen that only comes in black. [Hereafter referred to as black pens.] The other is the "elicker" type of retractable ball point pen that only comes in blue. [Hereafter referred to as blue pens.] Past experience has shown they can sell 280,000 black pens and 120,000 blue pens. The company sells all the pens they produce each month. (400,000) no pens show up in ending inventory on the balance sheet. The company's black pens are sold for $1.00 a piece to local retailers and blue pens are sold for $1.35 apiece. The company has 20 full production days a month, and 2 switchover days a month. When the company switches from making one type (color) of pen to another, they must shut down the plant for the equivalent of one whole working day. During the switch-over, the machines are cleaned with a chemical solution to remove any residual ink, and the parts for the different style of pens are put into the assembly machines. The chemical to flush the machines costs $15,000 each switch over day. This chemical can only be used once and must be disposed of in an environmentally safe manner. Below is some additional information. - Hourly employees are paid hourly. If they don't work, they don't get paid. - Salaried employees are paid monthly. The number of hours they work is irrelevant to their pay. - The company's relevant range is 300,000 to 500,000 pens per month. Above 500,000 pens a month the company must purchase additional assets to aid in production. The company has 10 machines that are used to make pens. The maximum capacity (per month) of a machine is 50,000 pens. Required: Answer the questions on the following pages
