Pike Skatedboard Co. makes specialized skatedboards. Pike seeks to be the leader in designs for skateboards and produces designs in lot sizes of 1,000 units Pike uses job order costing in conjunction with normal costing to measure and assign unit cost.
The following information is provided regarding the company's two production departments:
Department Design Department Assembly
Estimated overhead cost for year $100,000 $300,000
Activity base for department Direct labor hours Maching hours
Budgeted activity for the year $10,000 DL hours 5,000 machine hrs
Three jobs were started during a recent period and two were completed, Job 201 and Job202:
Job 201 Job202
Material cost $16,000 $24,000
Direct labor cost 5,000 12,000
Labor hours, design depart 120 240
Mach hrs assembly depart 100 120
Pike sells the skateboards to its subsidiary at a markup on cost of 30%.
a. What is the predetermined overhead rate for the design department? For the assembly department?
b. Why would Pike use two different predetermined overhead rates?
c. What is the total cost of Job 201?
d. What is the total selling price of Job 202?
The predetermined overhead rate is calculated as Estimated Overhead/Estimated base activity. For the two department, we are given the estimated overhead and the base activity. For Design department, the overhead is allocated based on Direct Labor Hours and for Assembly Department it is machine hours.
The predetermined overhead rates for the two departments would be calculated as follows:
Estimated MOH $100,000 /10,000 estimated direct labor hours = $10 per direct labor hour
The solution explains how to calculate the predetermined overhead rate and use that to calculate the cost of a job