At Steele Company, customers are charged a selling price which is based on manuf

Question

At Steele Company, customers are charged a selling price which is based on manufacturing costs of the job. The company is determining the selling price using the following formula: Price = Cost + 150% of Cost Cost of each job, in addition to direct material (DM) and direct labor (DL), includes a portion of factory overhead cost. In order to provide timely information on costs of jobs to managers, factory overhead portion of the cost of a job is determined based on estimate using a predetermined overhead rate based on machine hours. The predetermined overhead rate is developed at the start of the year based on estimated data for the upcoming year. Steele Company estimates that 10,000 direct labor hours and 16,000 machine hours will be worked during next year. Steele has provided the following estimated costs for the next year:

Direct materials $28,000

Direct labor 84,000

Sales commissions 112,000

Salary of production supervisor 56,000

Depreciation - Factory equipment 4,000

Indirect materials 11,200

Advertising expense 22,400

President salary 18,000

Rent on factory equipment 12,000

1. Compute the predetermined overhead rate for the assignment of factory overhead costs to jobs during the upcoming year.

2. Job 101 was one of the jobs completed during the year. Job 101 had used: $3,000 DM, $1,500 DL, 100 hours of DL, and 200 hours of machine hours. Compute the selling price for Job 101.

Explanation / Answer

1) Calculate predetemine overhead rate :

Overhead rate = 83200/16000 = 5.20 per machine hour

2) Calculate selling price for job 101

Direct material 3000 Direct labour 1500 Manufacturing overhead (200*5.2) 1040 Total manufacturing cost 5540 Add: Markup (5540*150%) 8310 Selling price of job 13850

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