Modern Metalworks Company has two? departments, milling and assembly. The compan
ID: 2391194 • Letter: M
Question
Modern Metalworks Company has two? departments, milling and assembly. The company uses a job costing system with a plantwide cost driver rate that is computed by dividing plantwide overhead costs by total plantwide practical capacity direct labor hours. The following cost and practical capacity estimates are for? October:
The following information pertains to job 714, which was started and completed during? October:
Requirements
(a) Determine the cost of job 714. ?
(b) Suppose that instead of using the plantwide cost driver? rate, the company uses machine hours as the cost driver for the applying overhead costs in the milling? department, and uses direct labor hours as the cost driver in the assembly department. Compute these departmental cost driver rates and determine the cost of job 714 using these rates.
(c) Using the costs you computed in parts a and b, determine the bid price that Modern Metalworks will quote under each cost system if it uses a 25% markup on total manufacturing cost.
(d) Provide reasons why Modern Metalworks might prefer the method in part a or the one in part b.
Estimates
Milling
Assembly
Overhead costs
$120,000
$160,000
Direct labor hours
8,000
12,000
Machine hours
12,000
6,000
PrintDone
Job information
Milling
Assembly
Direct labor hours
10
40
Machine hours
18
8
Direct materials costs
$800
$50
Direct labor costs
$100
$600
Milling
Assembly
Overhead costs
$120,000
$160,000
Direct labor hours
8,000
12,000
Machine hours
12,000
6,000
Explanation / Answer
(a)
Direct labor hour rate = Total overheads/Total direct labor hours
= 280,000/20,000
= $14
Calculation of cost of job 714
(b)
Overhead rate in Milling = Overheads/Machine hours
= 120,000/12,000
= $10 per machine hour
Overhead rate in Assembly = Overheads/Direct labor hours
= 160,000/12,000
= $13.33 per direct labor hour
Calculation of cost of job 714
(c) Mark-up required = 25% on manufacturing cost
Total manufacturing cost in part (a) = $2,250
Mark-up = 2,250 x 25%
= $562.5
Bid price = Cost + Mark-up
= 2,250 + 562.5
= $2,812.5
Hence, bid price in part (a) = $2,812.5
Total manufacturing cost in part (b) = $2,263
Mark-up = 2,263 x 25%
= $565.75
Bid price = Cost + Mark-up
= 2,263 + 565.75
= $2,828.75
Hence, bid price in part (b) = $2,828.75
(d)
The company might prefer part (b) method due to the following reasons:
- Activity based costing is more appropriate and provides more accurate cost as compared to single plantwide rate method.
- Under part (b), mark-up earned by the company is higher as compared to part (a)
Milling Assembly Total Overhead costs $120,000 $160,000 $280,000 Direct labor hours 8,000 12,000 20,000Related Questions
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