Sam Company uses job-order costing system to record and track the costs of its projects. The following information is provided for the decorating projects in January 2020:

Direct labour hours Machine hours Direct materials Direct labour cost

Project AQ01

300

100 $108,000 $520,000

Project AQ02

450

120 $150,000 $480,000

There was no work in process at the beginning of January 2020. Actual manufacturing overhead costs were $36,000 for January 2020.

Sam computes its predetermined overhead rate annually on the basis of machine hours. At the beginning of 2020, Sam estimated that its total manufacturing overhead would be $900,000, the total direct labour cost would be $6,000,000, and the company would work a total of 40,000 direct labour hours and 5,000 machine- hours on all projects.

Required:

(a) Project AQ01 was successfully completed and sold on 31 January 2020. Determine the job cost of Project AQ01 and its contract price if the markup percentage of this job is 50%. (5 marks)

(b) Assume that the company allocates any underapplied or overapplied manufacturing overhead to work in process, finished goods and cost of goods sold on the basis of 2:2:6, prepare the adjusting entry to show the allocation for January 2020. (8 marks)

(c) Sam Company has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the compensation of company's eight QC inspectors were charged as direct labour to the operation or job. In an effort to improve efficiency and quality, a computerized video QC system will be purchased in 2021 for $500,000. The machining staff will be offered voluntary redundancy. The company's President is confused. His Director of Operation has told him how efficient the new system is, yet there is a large increase in the manufacturing overhead rate. The information for automation in 2021 is shown below:

Budgeted manufacturing overhead Budgeted direct labour cost Budgeted machine hours

2021

$1,500,000 $5,000,000

6,000 hours

"Budgeted manufacturing overhead cost for 2021 increased significantly," lamented the President, "how can we compete with such a high manufacturing overhead rate?"

(i) Explain why companies develop manufacturing overhead rates. (2 marks)

(ii) Explain why the increase in the manufacturing overhead cost should not have a negative financial impact on Sam Company. (2 marks)

(iii) Explain what other factors Sam Company should take into account before deciding whether or not to purchase the computerized video QC system. (3 marks)