Integrative Case 7-61 Cost Estimation, Estimating Overhead Rates, Job Costing, a

Question

Integrative Case 7-61 Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision Making (LO 7-2, 3) O'Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O'Leary uses a normal job costing system. Direct labor at O'Leary is paid $17 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows: Year 2 69,000 54.000 Direct labor-hours worked Manufacturing overhead costs incurred Indirect labor Employee benefits Supplies S 2,760,000 2,160,000 810,000 1,035,000 690,000 552,000 138,000 716,250 1,982,500 751,250 S 8,625,000 522,000 138,000 656.250 1,982.500 751,250 $ 7.560,000 Heat and light Supervision ciation Property taxes and insurance Total manufacturing overhead costs At the beginning of year 3, O'Leary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, year 2. It is scheduled to ship on January 7, year 3. Job MC-275 is still in progress. The predetermined rate in year 2 was $130 per direct labor-hour. Data on direct material costs and direct labor-hours for these jobs in year 2 follow Job MC-270 Job MC-275 495,000 Direct material costs Direct labor-hours $ 270,000 2,500 hours 3,200 hours During year 3, o Leary incured the following direct material costs and direct labor-hours for all jobs worked in year 3, including the completion of Job MC-275 Direct material costs Direct labor-hours Actual manufact $ 9,120,000 For the purpose of computing the predetermined overhead rate, O'Leary uses the previous year's actual overhead rate. At the end of year 3, there were four jobs that had not yet shipped. Data on these jobs ollow: Direct materials Direct labor-hours Job status MC-389 $43,200 1,740 hours Finished 86 390 2,700 hours Finished MC-397 $103,500 6,100 hours MC-399 528,900 1,300 hours

Explanation / Answer

The actual overhead rate for Year 3= Total Manufacturing overhead/ Total Direct labor hours.

=$9,120,000/74,000

So overhead Rate per hour= $123.24 rounded off to $123.

So the actual rate in year 3 will be taken for bidding in year 4.

Sio the estimated Overhead cost for year 4= 5000*$123=$615,000

Direct material cost =$92,500

So the total cost for the project is $92,500+$615,000 = $707,500

So the minimum price to bid in order to not incurring any loss= $707,500

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