Integrative Case 7-77 (Algo) Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision Making (LO 7-2, 3)

OLeary Corporation manufactures special-purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). OLeary uses a normal job costing system. Direct labor at OLeary is paid $31 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows:

	Year 1	Year 2
Direct labor-hours worked	69,800	56,800
Manufacturing overhead costs incurred:
Indirect labor	$ 2,872,000	$ 2,272,000
Employee benefits	1,047,000	852,000
Supplies	698,000	568,000
Power	655,000	550,000
Heat and light	143,600	143,600
Supervision	784,370	664,650
Depreciation	2,066,500	2,066,500
Property taxes and insurance	807,530	835,250
Total manufacturing overhead costs	$ 9,074,000	$ 7,952,000

At the beginning of Year 3, OLeary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, Year 2. It is scheduled to ship on January 7, Year 3. Job MC-275 is still in progress. For the purpose of computing the predetermined overhead rate, OLeary uses the previous years actual overhead rate. Data on direct materials costs and direct labor-hours for these jobs in Year 2 follow:

	Job MC-270	Job MC-275
Direct materials costs	$ 272,800		$ 497,800
Direct labor-hours	2,640	hours	3,340	hours

During Year 3, OLeary incurred the following direct materials costs and direct labor-hours for all jobs worked in Year 3, including the completion of Job MC-275:

Direct materials costs	$ 11,842,800
Direct labor-hours	76,800
Actual manufacturing overhead	$ 9,792,000

At the end of Year 3, there were four jobs that had not yet shipped. Data on these jobs follow:

	MC-389	MC-390	MC-397	MC-399
Direct materials	$ 46,000		$ 69,800		$ 106,300		$ 31,700
Direct labor-hours	1,768	hours	2,840	hours	6,240	hours	1,440	hours
Job status	Finished	Finished	In progress	In progress

Required:

What were the amounts in the beginning Finished Goods and beginning Work-in-Process accounts for Year 3?

OLeary incurred direct materials costs of $59,800 and used an additional 580 hours in Year 3 to complete Job MC-275. What was the final (total) cost charged to Job MC-275?

What was over- or underapplied overhead for Year 3?

OLeary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the journal entry to prorate the over- or underapplied overhead.

A customer has asked OLeary to bid on a job to be completed in Year 4. OLeary estimates that the job will require about $93,900 in direct materials and 5,140 direct labor-hours. Because of the economy, OLeary expects demand for its services to be low in Year 4, and the CEO wants to bid aggressively but does not want to lose any money on the project. OLeary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount OLeary can bid on the job and still not incur a loss?