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SportsCo Ltd. manufactures a range of specialised Gym equipment and the business is divided into three manufacturing departments. The business uses a job costing system
SportsCo Ltd. manufactures a range of specialised Gym equipment and the business is divided into three manufacturing departments. The business uses a job costing system with all work is carried out according to customers' orders, and job orders requiring varying amounts of time in each department. The budgeted costs for 2021 are as follows: Dept. 1 Dept. 2 Dept. 3 Direct Material Total 360,000 320,000 320,000 Direct Labour Manufacturing Overhead 100,000 120,000 80,000 140,000 120,000 80,000 It was anticipated that machine hours worked would be 20,000 in Department 1, 16,000 in Department 2 and 4,000 in Department 3.. During 2020, manufacturing overhead was applied to jobs carried out on the basis of direct labour hours, using a predetermined rate calculated on a plant- wide basis. Labour costs 40 per hour. The company is now considering switching to individual departmental rates, using machine hours as the basis in Departments 1 and 2 and labour hours as the basis in Department 3. SportsCo has been asked to quote for a specific job for Lifestyle Gyms and the business has estimated the costs of producing this piece of equipment to be as follows: Direct Materials 3,800 Direct Labour Dept. 1 1,500 Dept. 2 1,000 Dept. 3 1,400 3,900 The job will require 220 machine hours in Department 1, 160 in Department 2 and 50 in Department 3. a) Calculate the total manufacturing cost of the job order by Lifestyle Gyms if the existing plant-wide overhead rate is used. b) Calculate the total manufacturing cost of job using the proposed departmental overhead rates in the manner now under consideration by the company. c) Based on your calculations in (a) and (b) above which estimate should the company quote for the job being considered and give your reasons why
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