Question: Suggest a better approach for allocating overhead. Allocate costs using your approach and compare the costs of both jobs under the two systems.

Other information from other questions

The total overhead cost ($4,030,000 )have been allocated based on the direct labour hours (27000). This works out to $149.26 as the overhead absorption rate. Since predominantly , machines are used in each department and the machine hours are more than the direct labour hours in each deparment, the machine hour rate should have been used for absorption of overhead costs. This will work out to $ 67.78 as against $149.26 as the overhead absorption rate as shown below.

Overhead cost /machine hours

$4,030,000/59,461= $67.78.

Our costs are out of control, our accounting system is screwed up, or both!" screamed the sales manager. "We are simply not competitive on a great many of the jobs we bid on. Just last week we lost a customer when a competitor under-bid us by 25% ! And I bid the job at cost because the customer has been with us for years but has been complaining about our prices." This problem, raised at the weekly management meeting, has been getting worse over the years. The Candor Medical Instrument Company produces custom medical instruments for specific customer orders. When the firm first became successful, it employed nearly 500 skilled machinists. Over the years the firm became increasingly automated and now uses a number of different robotic machines. The firm currently employs only 75 production workers, but output has quadrupled The problems raised by the sales manager can be seen in the portions of two bid sheets brought to the meeting (Exhibit 1). These bids represent a typical small Job (Bid # 74683) and a typical large job (Bid # 74687). Each job has direct material, direct labor and overhead, which is allocated to jobs using a plant-wide overhead rate based of direct labor hours. For the current period, Candor expects to use 27,000 direct labor hours. Overhead, consisting mostly of depreciation on the robotic equipment, is expected to be $4,030,000 An employee can typically set up any job on the appropriate equipment in about 15 minutes. Once machines are operating, an employee oversees five to eight machines simultaneously. All that is required is to load or unload materials and monitor calibrations. The robotic machines will log a total of 59461 hours of run time in the current period For bid # 74683 the firm was substantially underbid by a competitor. The firm did get the job for bid # 74687, but the larger jobs are harder to find. Small jobs arise frequently, but the firm is having more difficulty in successfully obtaining them