Marvettas Shop applies coating finishes to a variety of materials and parts. The coating involves the application of powder to a surface, after which the powder is fused into a continuous film by the application of heat or radiant energy and the process results in a durable finish that resists rust.

In the previous years at Matvettas Shop, finishes were applied by hand, and manufacturing overhead was allocated to jobs based on direct labor hours the rate was $10 per hour based on overhead of $800,000 and 80,000 direct labor hours.

At the start of the current year, the company purchased and installed a computer-controlled, coating system at a cost of $1,500,000. It has a five-year life, the equipment adds $300,000 a year to manufacturing overhead, the expected total overhead is now $1,100,000. However, labor has been reduced by 20,000 hours per year because the equipment reduces the need for labor, and with an average wage rate of $20 per hour, $400,000 of wages are expected to be saved in the current year.

Marvettas Shop purchased a computer-controlled system including a new spray chamber, it kept its old spray booth and manual equipment for use on small jobs.

Marvettas Shop has just received an order from Donnies a small manufacturer of outdoor furniture to powder coat 4 tables and 16 chairs. On small orders such as this, Marvetta uses its old spray booth and manual equipment rather than the new computer controlled system. Material cost for the job will be $400, and 6 labor hours are required.

Use the information provided to estimate the full cost of the job in the current year and assume the company uses one company-wide overhead rate.

What would have been the cost of the job in part (a) in the prior year?

Kathy the plant manager, observed that Last year, jobs like the one we did for Donnies cost less. But, I know were not less efficient at handling small jobs. We use the same equipment, the same labor, and the same products on small jobs this year as last year, and yet the accounting system is making small jobs look more expensive. Explain to Kathy why the accounting system is making small jobs appear more costly in the current year.

Does the fact that small jobs have a higher cost in the current year suggest that prices for small jobs should be increased?