Problem 5-31 Plantwide versus Departmental Overhead Rates; Underapplied or Overapplied Overhead [LO3, LO5, LO7]

Dont tell me weve lost another bid! exclaimed Janice Hudson, president of Prime Products Inc. Im afraid so, replied Doug Martin, the operations vice president. One of our competitors underbid us by about $12,000 on the Hastings job. I just cant figure it out, said Hudson. It seems were either too high to get the job or too low to make any money on half the jobs we bid. Whats happened?

Prime Products manufactures specialized goods to customers specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labour cost. The following estimates were made at the beginning of the year:

	Department
	Cutting	Machining	Assembly	Total Plant
Direct labour	$	315,000		$	210,000		$	420,000		$	945,000
Manufacturing overhead	$	567,000		$	840,000		$	105,000		$	1,512,000

Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows:

	Department
	Cutting	Machining	Assembly	Total Plant
Direct material	$	20,000		$	1,900		$	7,600		$	29,500
Direct labour	$	11,500		$	3,700		$	19,000		$	34,200
Manufacturing overhead		?			?			?			?

The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs.

Required:

1. Assuming the use of a plantwide overhead rate:

a. Compute the rate for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.

2. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:

a. Compute the rate for each department for the current year.

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.

3. This part of the question is not part of your Connect assignment.

4. Assume that it is customary in the industry to bid jobs at 140% of total manufacturing cost (direct materials, direct labour, and applied overhead).

a. What was the companys bid price on the Hastings job?

b. What would the bid price have been if departmental overhead rates had been used to apply overhead cost?

5. At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year:

	Department
	Cutting	Machining	Assembly	Total Plant
Direct material	$	805,000		$	95,000		$	430,000		$	1,330,000
Direct labour	$	340,000		$	225,000		$	356,000		$	921,000
Manufacturing overhead	$	595,000		$	889,300		$	96,300		$	1,580,600

a. Compute the underapplied or overapplied overhead for the year, assuming that a plantwide overhead rate is used.

b. Compute the underapplied or overapplied overhead for the year, assuming that departmental overhead rates are used.