Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 35

Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision Making

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 1	Year 2
Direct labor-hours worked	69,000	54,000
Manufacturing overhead costs incurred
Indirect labor	$2,760,000	$2,160,000
Employee benefits	1,035,000	810,000
Supplies	690,000	540,000
Power	552,000	522,000
Heat and light	138,000	138,000
Supervision	716,250	656,250
Depreciation	1,982,500	1,982,500
Property taxes and insurance	751,250	751,250
Total manufacturing overhead costs	$8,625,000	$7,560,000

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
Direct material costs	$270,000	$495,000
Direct labor-hours	2,500 hours	3,200 hours

During year 3, O?Leary incurred 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	$11,840,000
Direct labor-hours	74,000
Actual manufacturing overhead	$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 follow:

	MC-389	MC-390	MC-397	MC-399
Direct material costs	$43,200	$67,000	$103,500	$28,900
Direct labor-hours	1,740 hours	2,700 hours	6,100 hours	1,300 hours
Job status	Finished	Finished	In progress	In progress

Required

a. What was the amount in the beginning Finished Goods and beginning Work-In-Process accounts for year 3?

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b. O’Leary incurred direct materials cost of $57,000 and used an additional 300 hours in year 3 to complete job MC-275. What was the final (total) cost charged to job MC-275?

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c. What was over- or underapplied overhead for year 3?

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d. O’Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-In-Process Inventory. Prepare the journal entry to prorate the Over- or Underapplied Overhead computed in requirement (c).

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e. A customer has asked O’Leary to bid on a job to be completed in year 4. O’Leary estimates that the job will require about $92,500 in direct materials and 5,000 direct labor-hours. Because of the economy, O’Leary expects demand for their services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O’Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O’Leary can bid on the job and still not incur a loss?

Step 1 of 5

This problem relates overhead allocation to cost estimation and decision making. It uses some of the methods of Chapters 4 and 5.

a. $965,400 (Work-in-Process Inventory) and $637,500 (Finished Goods Inventory).

Job MC-275 is the only job in process. It has accumulated the following costs:

Direct materials?	$495,000	(Given)
Direct labor?	54,400	(= $17 x 3,200 hours)
Manufacturing overhead?	416,000	(= $130 x 3,200 hours)
	$965,400

Job MC-270 is the only job in finished goods. It has accumulated the following costs:

Direct materials?	$270,000	(Given)
Direct labor?	42,500	(= $17 x 2,500 hours)
Manufacturing overhead?	325,000	(= $130 x 2,500 hours)
	$637,500