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 $28 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 69,200 56,200 Manufacturing overhead costs incurred Indirect labor $ 2,848,000 $ 2,248,000 Employee benefits 1,038,000 843,000 Supplies 692,000 562,000 Power 649,000 544,000 Heat and light 142,400 142,400 Supervision 782,630 662,850 Depreciation 2,048,500 2,048,500 Property taxes and insurance 795,470 817,250 Total manufacturing overhead costs $ 8,996,000 $ 7,868,000 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. For the purpose of computing the predetermined overhead rate, O’Leary uses the previous year’s actual overhead rate. 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 $ 272,200 $ 497,200 Direct labor-hours 2,610 hours 3,310 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 $ 11,842,200 Direct labor-hours 76,200 Actual manufacturing overhead $ 9,648,000 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 materials $45,400 $69,200 $105,700 $31,100 Direct labor-hours 1,762 hours 2,810 hours 6,210 hours 1,410 hours Job status Finished Finished In progress In progress Required: a. 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. b. 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 $93,600 in direct materials and 5,110 direct labor-hours. Because of the economy, O’Leary expects demand for its 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?
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
| Year 1 | Year 2 | ||||
| Direct labor-hours worked | 69,200 | 56,200 | |||
| Manufacturing overhead costs incurred | |||||
| Indirect labor | $ | 2,848,000 | $ | 2,248,000 | |
| Employee benefits | 1,038,000 | 843,000 | |||
| Supplies | 692,000 | 562,000 | |||
| Power | 649,000 | 544,000 | |||
| Heat and light | 142,400 | 142,400 | |||
| Supervision | 782,630 | 662,850 | |||
| 2,048,500 | 2,048,500 | ||||
| Property taxes and insurance | 795,470 | 817,250 | |||
| Total manufacturing overhead costs | $ | 8,996,000 | $ | 7,868,000 | |
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. For the purpose of computing the predetermined overhead rate, O’Leary uses the previous year’s actual overhead rate. 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 | $ | 272,200 | $ | 497,200 | ||
| Direct labor-hours | 2,610 | hours | 3,310 | 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 | $ | 11,842,200 |
| Direct labor-hours | 76,200 | |
| Actual manufacturing overhead | $ | 9,648,000 |
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 materials | $45,400 | $69,200 | $105,700 | $31,100 |
| Direct labor-hours | 1,762 hours | 2,810 hours | 6,210 hours | 1,410 hours |
| Job status | Finished | Finished | In progress | In progress |
Required:
a. O’Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the
b. 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 $93,600 in direct materials and 5,110 direct labor-hours. Because of the economy, O’Leary expects demand for its 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?
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