MANAGERIAL ACCOUNTING 631

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 3
Budgeted Results
Revenue	$2,400,000		$2,700,000		$2,000,000
Direct materials	360,000		405,000		320,000
Direct labor	720,000		810,000		650,000
Variable factory overhead	144,000		162,000		130,000
Fixed variable overhead	400,000		400,000		400,000
Variable selling and administrative expenses	240,000		300,000		220,000
Fixed selling and administrative expenses	200,000		180,000		200,000
Actual Results
Revenue	$2,320,000		$2,800,000
Direct materials	380,000		430,000
Direct labor	725,000		900,000
Variable factory overhead	140,000		160,000
Fixed variable overhead	425,000		440,000
Variable selling and administrative expenses	260,000		300,000
Fixed selling and administrative expenses	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.

Required:

1. Compute the total overhead application rates for years 1, 2, and 3.

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 order.

		Year 2		Year 3
Direct materials		$15,000		$15,500
Direct labor		$30,000		$32,000

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.