Question

Computing Predetermined Overhead Rates and Job Costs LO2-1, LO2-2, LO2-3 Moody Corporation uses a job-order costing system with a plantwide predetermined overhead rate based on machine-hours. At the beginning of the year, the company made the following estimates:
Machine-hours required to support estimated production 100,000
Fixed manufacturing overhead cost 6,50,000
Variable manufacturing overhead cost per machine-hour $3.00
Required:
1. Compute the plantwide predetermined overhead rate
2. During the year, Job 400 was started and completed. The following information was available with respect to this job:
Direct material 450
Direct labor cost 210
Machine hours used 40
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 for Job 400?
5. If Moody hired you as a consultant to critique its pricing methodology, what would you say?

Answer 1

Answer:

1. $6.50 per machine hour

2. $920

3. $ 17.69

4. $21.23

5. Pricing  methodology - Cost plus Mark -up

- This ensures that the price charged covers all costs related to the product,  which is good for maintaining profits.

- However the price does not consider the market demand and competition which might affect sales volumes

Explanation:

Predetermined overhead rate

Predetermined overhead rate = Budgeted Overheads / Budgeted Activity

                                                  = $650,000 / 100,000

                                                  = $6.50 per machine hour

Total manufacturing cost assigned to Job 400

Direct material                                $450

Direct labor cost                              $210

Overheads Applied ($6.50 × 40)  $260

Total manufacturing cost               $920

Unit product cost for Job 400

Unit product cost  = Total Cost / Number of units completed

                              =  $920 / 52 units

                              = $ 17.6923

                              =  $ 17.69

Selling price if Moody uses a markup percentage of 120%

Selling price  = Unit product cost × 120 %

                      = $ 17.69 × 120%

                      = $21.23