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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

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 $21 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 67,800 54,800
Manufacturing overhead costs incurred:
Indirect labor $ 2,792,000 $ 2,192,000
Employee benefits 1,017,000 822,000
Supplies 678,000 548,000
Power 635,000 530,000
Heat and light 139,600 139,600
Supervision 778,570 658,650
Depreciation 2,006,500 2,006,500
Property taxes and insurance 767,330 775,250
Total manufacturing overhead costs $ 8,814,000 $ 7,672,000

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 $ 270,800 $ 495,800
Direct labor-hours 2,540 hours 3,240 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 $ 11,840,800
Direct labor-hours 74,800
Actual manufacturing overhead $ 9,312,000

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 $ 44,000 $ 67,800 $ 104,300 $ 29,700
Direct labor-hours 1,748 hours 2,740 hours 6,140 hours 1,340 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 $57,800 and used an additional 380 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 $92,900 in direct materials and 5,040 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?

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