Racers Mini-case: Plant-wide vs. De l overhead rates \"Don\'t tell me we\'ve los

Question

Racers Mini-case: Plant-wide vs. De l overhead rates "Don't tell me we've lost another bid!" exclaimed Leigh Garcia, president of Speed Racers Manufacturing. "I'm afraid so," replied Charlie Townsend, the operations vice president. "One of our competitors underbid us by about $6,000 on the Lopez job." "I just can't figure it out," said Garcia. "It seems we're either too high to get the job or too low to make any money on half the jobs we bid anymore. What's happened?" Speed Racers manufactures specialized racing cars to customers' specifications. It bids on jobs by estimating the total manufacturing costs (materials, labor and overhead) and then marks up its costs by 150%, which is the industry standard markup. Overhead is allocated to jobs based on direct labor costs (i.e., the denominator volume). Speed Racers has three departments and estimated the following costs at the beginning of the year. It used these costs to compute a plant-wide (i.e., total plant) allocation rate Department Fabricatin $200,000 $350,000 Assembly 300,000 90,000 Machin Direct Labor Overhead 100,000 $400,000 Total Plant $600,000 840,000 Jobs require varying amounts of work in the three departments. The Lopez job would have required the manufacturing costs in the three departments as follows: Direct Materials Direct Labor Overhead Fabricating 3,000 $2,800 Machining $200 $500 Assembly 1,400 $6,200 Total Plant $4,600 $9,500 1. Assuming that Speed Racers uses a plant-wide overhead rate: Compute the allocation rate for the current year Determine the amount of overhead and the total estimated cost of the Lopez job Compute the bid for the job (recall total costs are marked up 150% for bids) * 2. Now assume that Speed Racers uses a separate overhead rate for each department: Compute the allocation rate for each department for the current year (3 rates) Determine the amount of overhead and the total estimated cost of the Lopez job Compute the bid for the job (recall total costs are marked up 150% for bids) 3. Explain the difference between the cost estimates you computed, above. 4. What insight do the above answers provide regarding Leigh Garcia's lament, "It seems we're either too high to get the job or too low to make any money on half the jobs we bid anymore.

Explanation / Answer

1) a) Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated total amount of the allocation base Predetermined overhead rate = $840,000/$600,000 direct labor cost 140.00% of direct labor cost b) Estimated Manufacturing Overhead = $9,500 × 140% = $13,300.00 c) Direct materials $4,600.00 Direct Labor $9,500.00 Manufacturing overhead applied (above) $13,300.00 Total manufacturing cost $27,400.00 Bidding rate 150.00% Total Bid Price $41,100.00 2) a)                   Department Fabricating Machining Assembly Total Plant Estimated manufacturing overhead cost (a) $350,000 $400,000 $90,000 $840,000 Estimated direct labor cost (b) $200,000 $100,000 $300,000 $600,000 Predetermined overhead rate (a) ÷ (b) 175.00% 400.00% 30.00% 140.00% Direct labor plant wide overhead rate Applied Overhead Fabricating $2,800 175.00% $4,900 Machining $500 400.00% $2,000 Assembly $6,200 30.00% $1,860 Total applied overhead $8,760 c) Direct materials $4,600.00 Direct Labor $9,500.00 Manufacturing overhead applied (above) $8,760.00 Total manufacturing cost $22,860.00 Bidding rate 150.00% Total Bid Price $34,290.00

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