Chapter 2, Problem 16P

PROBLEM 2—16 Plantwide Predetermined Overhead Rates; Pricing LO2−1, LO2−2, LO2−3

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates:

Direct labor-hours required to support estimated production	140,000
Machine-hours required to support estimated production	70,000
Fixed manufacturing overhead cost	$784,000
Variable manufacturing overhead cost per direct labor-hour	$2.00
Variable manufacturing overhead cost per machine-hour	$4.00

During the year, Job 550 was started and completed. The following information is available with respect to this job:

Direct materials	$175
Direct labor cost	$225
Direct labor-hours	15
Machine-hours	5

Required:

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:
1. Compute the planide predetermined overhead rate.
2. Compute the total manufacturing cost of Job 550.
3. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?
2. Assume that Landen’s controller believes that machine-hours is a better allocation base than direct labor-hours. Under this approach:
1. Compute the planPide predetermined overhead rate.
2. Compute the total manufacturing cost of Job 550.
3. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?
3. Assume that Landen’s controller is right about machine-hours being a more accurate overhead cost allocation base than direct labor-hours. If the company continues to use direct labor-hours as its only overhead cost allocation base what implications does this have for pricing jobs such as Job 550?