Chapter 2, Problem 12E

Computing Predetermined Overhead Rates and Job Costs
Moody Corporation uses a job-order costing system with a p1antide predetermined overhead rate based on machine-hours. At the beginningof the year, the company made the following estimates:

Required:
1. Compute the p1antide predetermined overhead rate.
2. During the year, Job 400 was started and completed. The following information was available with respect to this job:

Compute the total manufacturing cost assigned to Job 400.
3. If Job 400 includes 52 units, what is the unit product cost for this job?
4. If Moody uses a markup percentage of 120% of its total manufacturing cost then what selling price per unit would it have established forJob 400?
5. If Moody hired you as a consultant to critique its pricing methodology, what would you say?

To determine

Predetermined overhead rate: Predetermined overhead rate refers to the rate of estimated overhead which need to be followed by a firm.

Total manufacturing cost: Total manufacturing cost refers to the overall costs of manufacturing a specific product.

Requirement − 1:

Plant wide predetermined overhead rate.

Answer to Problem 12E

Solution: Plant wide predetermined overhead rate is $9.5 per machine hour

Explanation of Solution

• Given: Following information are given in the question:

Fixed manufacturing overhead cost = $650000

Machine hours required = 100000

Variable manufacturing overhead cost per machine hour = $3.00

• Formula used: Following formula will be used for calculating plant wide predetermined overhead rate;

  $\text{Plantwide predetermined overhead rate}\text{=}\frac{\text{Estimated total manufacturing overhead}}{\text{Estimated total machine hours}}$

• Calculation: As per formula it is clear that we need to know estimated total manufacturing overhead and estimated total machine hours.

  $\begin{array}{l}\text{Estimated total manufacturing overhead = }\\ \text{Fixed manufacturing overhead + Variable manufacturing overhead}\end{array}$

Fixed manufacturing overhead = $650000

  $\text{Variable manufacturing overhead = 100000 \&*\#x00A0;\$3 = \$300000}$

  $\text{Thus, Estimated total manufacturing overhead = \$650000 + \$300000 = \$950000}$

Estimated machine hours = 100000

Now let’s put values in the above given formula;

  $\begin{array}{l}\text{Plantwide predetermined overhead rate}\text{=}\frac{\text{\$950000}}{\text{100000}}\\ =\$9.5\text{per machine hour }\end{array}$

Conclusion

Thus, above calculated is the plant wide predetermined overhead rate.

To determine

Total manufacturing cost assigned to job-400.

Answer to Problem 12E

Solution:

Total manufacturing cost assigned to job is $1040

Explanation of Solution

• Given: Following information are given in the question:

Direct materials = $450

Direct labor cost = $210

Machine hours used = 40

• Formula used: Following formula will be used for calculating total manufacturing cost:

  $\begin{array}{l}\text{Total manufacturing cost = }\\ \left(\text{Direct materials + Direct labor cost + Manufacturing overhead applied}\right)\end{array}$

• Calculation: As per information of the question direct materials, direct labor cost are given but we have to calculate manufacturing overhead applied.

Direct materials = $450

Direct labor cost = $210

  $\text{Manufacturing overhead applied }\left(\text{40 \&*\#x00A0;\$9}\text{.50}\right)\text{ = \$380}$

Now let’s put the values in the above mentioned formula;

  $\text{Total manufacturing cost }\left(\text{\$450 + \$210 + \$380}\right)\text{ = \$1040}$

Conclusion

Thus, above calculated is the total manufacturing cost assigned to job-400.

To determine

Unit product cost: Unit product cost refers to the average cost of goods manufactured. In other words we can say that when total manufacturing cost is divided by the number of units manufactured then we will get unit product cost.

To identify: Unit product cost for job-400.

Answer to Problem 12E

Solution:

  $\begin{array}{l}\text{Unit product cost = }\frac{\text{\$1040}}{\text{52}}\\ =\$20\text{per unit}\end{array}$

Explanation of Solution

• Given: Following information are given in the question:

Direct materials = $450

Direct labor cost = $210

Machine hours used = 40

Overhead rate = $9.50 per machine hour

Number of units = 52

• Formula used: Following formula will be used;

  $\text{Unit product cost = }\frac{\text{Total manufacturing cost}}{\text{Number of units in the job}}$

• Calculation:
First of all we have to calculate total manufacturing overhead;

  $\text{Total manufacturing cost }\left(\text{\$450 + \$210 + \$380}\right)\text{ = \$1040}$

Number of units in the job = 52 units

Now let’s put the values in the above given formula;

  $\begin{array}{l}\text{Unit product cost = }\frac{\text{\$1040}}{\text{52}}\\ =\$20\text{per unit}\end{array}$

Conclusion

Thus, above calculated is the unit product cost for job-400.

To determine

Selling price per unit: Selling price per unit refers to the price at which manufactured units can be sold.

To identify: Selling price per unit if moody uses a markup percentage of 120% of it’s total manufacturing cost.

Answer to Problem 12E

Solution:

Per unit selling price will be calculated as follow:

$\begin{array}{l}\text{Per unit selling price = }\frac{\$2288}{52}\\ =\$44\text{per unit}\end{array}$

Explanation of Solution

• Given:

Following information are available as per question:

  $\text{Total manufacturing cost }\left(\text{\$450 + \$210 + \$380}\right)\text{ = \$1040}$

Markup = 120% of manufacturing cost

• Formula used:

  $\text{Selling price per unit = }\frac{\text{Total selling price of the job}}{\text{Number of units}}$

  $\text{Total selling price of the job}=\text{Total manufacturing cost + markup}$

• Calculation:

Markup (120% of manufacturing cost) =

  $\begin{array}{l}\$1040\text{\&*\#x00A0;}\frac{120}{100}\text{ = \$1248}\\ \text{Thus total selling price (\$1040 + \$1248) = \$2288 }\end{array}$

Number of units in the job = 52 units

Now let’s put the values in the above given formula;

  $\begin{array}{l}\text{Per unit selling price = }\frac{\$2288}{52}\\ =\$44\text{per unit}\end{array}$

Conclusion

Thus, above calculated is the per unit selling price for job-400.

To determine

To Explain: Critically analysis of pricing methodology of Moody Corporation.

Explanation of Solution

As per information of the question it is clear that Moody Corporation is selling it’s product at 120% markup. It means Moody corporation is charging 120% more than its’ manufacturing costs. So no doubt this selling price methodology is profitable to this corporation because it will result into higher amount of profits.

But we know that such high markup can make some negative impact on the overall sale of this corporation hence high markup can result into lower quantity of sale. Thus it should be kept in mind that before deciding for such high markup, a corporation must consider selling price being offered by other manufacturers too.

Conclusion

Thus overall we can say that although this pricing methodology of Moody Corporation is is good but negative impact of this pricing methodology must be considered.