Question Details Diamonds, Etc. manufactures jewerly settings and sells them to

Question

Question Details
Diamonds, Etc. manufactures jewerly settings and sells them to retail stores. In the past, most settings were made by hand, and overhead allocations rate in the prior year was $10 per labor hour ($2,000,000 overhead divided 200,000 labor hours). In the current year, overhead increased by $400,000 due to acquisition of equipment. Labor, however, decreased by 50,000 hours because the equipment allows rapid creation of the settings. One of the company's many customers is a local jewerly store, jasmine's Fine jewerly. This store is relatively small and the time to make an order of jewerly pieces is typically less than 8 hours. On such jobs (less than 8 labor hours), the new equipment is not used, and thus the jobs are relatively labor intensive.

Required:

A. Assume that in the current year, the company continues to allocate overhead based on labor hours. What would be the overhead cost of an 8-labor0hour job requested by Jasmine's Fine Jewerly? How does this compare to the overhead cost charged to such a job in the prior year?

B. Assume that the price charged for small jobs does not change in the current year. Are small jobs less profitable than they were in the past?

Explanation / Answer

A. Total OH cost is $2000,000+$400,000 = $2400,000 Total No of Labour Hrs = 200,000 SO OH Rate per Lab Hr = Total OH/Total Lab Hrs = $2400,000/200,000 = $12 per Lab hr So for an 8 Lab Hr job, OH Cost = Lab Hrs * OH Rte per Lab hr = 8*$12 = $96 Before new eqpt, Ttal OH Cost was $2000,000 & No of Lab Hrs were 200,000 So OH Rate per Lab Hr was = $2000,000/200,000 = $10 per LabHr So for an 8Lab Hr job, OH Cost was 8*$10 = $80 So in current Year, OH cost for an 8 Hr job has increased by $96-$80 = $16. B. If the OH rate in Current Year remains same as Last year, it will result in Underrecovery of OH costs. So either small jobs should absorb the actual OH cost or should not be prodicued.

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