Job Cost Case

The sales manager, Jen Swenson, at Gelco, Inc. has contacted your team because their department continues to lose bids to the competition. Gelco, Inc. manufactures customized products and uses a job-order-costing system. The latest bid that was lost was the Livingston Job.

Jen is concerned that they are not estimating the costs correctly. They have determined that in order to be profitable, they must mark-up the products 150%. They have been applying overhead on the basis of direct labor costs for the entire factory. She is thinking that maybe this should be changed and that overhead should be applied by department.

Below are the estimates that were made at the beginning of the year to calculate the predetermined overhead rate. Overhead is calculated based on direct labor costs.

	Cutting	Assembly	Painting	Total Factory
Direct Labor	$600,000	$100,000	$50,000	$ 750,000
FOH	$520,000	$426,000	$100,000	$1,046,000

Each job requires varying amounts of work in different departments. The costs estimated for each department for the Livingston Job are below.

	Cutting	Assembly	Painting	Total
Direct Materials	$15,000	$1,000	$ 3,500	?
Direct Labor	$ 7,630	$1,600	$12,512	?

The company currently uses a factory wide overhead rate to apply factory overhead to cost out jobs.

1. Calculate the predetermined overhead rate based on the total factory
2. Determine the total estimated cost of the Livingston Job utilizing your calculation in number 1.
3. Assume that the company instead uses a separate predetermined overhead rate for each department. Calculate the rate for each department. Re-calculate the total cost of the Livingston Job utilizing the POHR per department.
4. Calculate the bid price for the Livingston Job based on each situation
   1. POHR based on the total factory
   2. POHR based on each department
5. At the end of the year the company reported the following actual cost data related to all jobs worked during the year. Calculate the underapplied or overapplied overhead for the year assuming
   1. that the factory wide overhead rate was used.
   2. that the overhead rate per department was used.

	Cutting	Assembly	Painting
Direct Materials	$860,000	$ 95,000	$ 420,000
Direct Labor	$476,000	$210,000	$ 440,000
FOH	$560,000	$825,000	$1,256,000

6. Based on your analysis, write a brief memo to Jen Swenson explaining your results and giving a recommendation for the application of overhead to future jobs.