Case 1
Case #1, Part 1
“Don’t tell me we’ve lost another bid!” exclaimed Sandy Kovallas, president of Lenko Products, Inc. “I’m afraid so,” replied Doug Martin, the operations vice president. “One of our competitors underbid us by about $10,000 on the Hastings job.” “I just can’t figure it out,” said Kovallas. “It seems we’re either too high or get the job or too low to make any money on half the jobs, we bid anymore. What’s happened?”
Lenko Products manufactures specialized goods to customers’ specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made at the beginning of the year:
Department
Cutting
Machining
Assembly
Total Plant
Direct labor
$300,000
$200,000
$400,000
$900,000
Manufacturing overhead
$540,000
$800,000
$100,000
$1,440,000
Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows:
Department
Cutting
Machining
Assembly
Total Plant
Direct materials
$12,000
$900
$5,600
$18,500
Direct labor
$6,500
$1,700
$13,000
$21,200
Manufacturing overhead
?
?
?
?
The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. Required:
1. What is the problem at Lenko?
Lenko is not getting bids.
2. Assuming that the use of a plantwide overhead rate:
a. Compute the rate for the current year.
$1,440,000 / $900,000 = 1.6
b. Determine the amount of manufacturing overhead cost that would have been applied to the Hasting job.
1.6 * $21,200 = $33,920
3. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:
a. Compute the rate for each department for the current year.
Cutting- $540,000 / $300,000 = 1.8
Machining- $800,000 / $400,000 = 4
b. Determine the amount of manufacturing overhead cost that would have been
“Don’t tell me we’ve lost another bid!” exclaimed Sandy Kovallas, president of Lenko Products, Inc. “I’m afraid so,” replied Doug Martin, the operations vice president. “One of our competitors underbid us by about $10,000 on the Hastings job.” “I just can’t figure it out,” said Kovallas. “It seems we’re either too high or get the job or too low to make any money on half the jobs, we bid anymore. What’s happened?”
Lenko Products manufactures specialized goods to customers’ specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made at the beginning of the year:
Department
Cutting
Machining
Assembly
Total Plant
Direct labor
$300,000
$200,000
$400,000
$900,000
Manufacturing overhead
$540,000
$800,000
$100,000
$1,440,000
Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows:
Department
Cutting
Machining
Assembly
Total Plant
Direct materials
$12,000
$900
$5,600
$18,500
Direct labor
$6,500
$1,700
$13,000
$21,200
Manufacturing overhead
?
?
?
?
The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. Required:
1. What is the problem at Lenko?
Lenko is not getting bids.
2. Assuming that the use of a plantwide overhead rate:
a. Compute the rate for the current year.
$1,440,000 / $900,000 = 1.6
b. Determine the amount of manufacturing overhead cost that would have been applied to the Hasting job.
1.6 * $21,200 = $33,920
3. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions:
a. Compute the rate for each department for the current year.
Cutting- $540,000 / $300,000 = 1.8
Machining- $800,000 / $400,000 = 4
b. Determine the amount of manufacturing overhead cost that would have been