Marine Components produces parts for airplanes and ships. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus a fixed fee (cost plus). For the upcoming year (year 2), Marine expects only two clients (client 1 and client 2). The work done for client 1 will all be done under fixed-price contracts while the work done for client 2 will all be done under cost-plus contracts
Exercise 7-38 (Algo) Predetermined Overhead Rates: Ethical Issues (LO 7-3, 5)
Marine Components produces parts for airplanes and ships. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus a fixed fee (cost plus). For the upcoming year (year 2), Marine expects only two clients (client 1 and client 2). The work done for client 1 will all be done under fixed-price contracts while the work done for client 2 will all be done under cost-plus contracts.
Manufacturing overhead for year 2 is estimated to be $10 million. Other budgeted data for year 2 include the following.
| Client 1 | Client 2 | |||||
| Machine-hours (thousands) | 2,500 | 2,500 | ||||
| Direct labor cost ($000) | $ | 1,600 | $ | 6,400 | ||
Required:
a. Compute the predetermined rate assuming that Marine Components uses machine-hours to apply overhead.
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b. Compute the predetermined rate assuming that Marine Components uses direct labor cost to apply overhead.
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