Case 1 Essay

1045 Words Mar 19th, 2015 5 Pages
Case #1, Part 1

“Don’t tell me we’ve lost another bid!” exclaimed Sandy Kovallas, president of Lenko Products, Inc. “I’m afraid so,” replied Doug Martin, the operations vice president. “One of our competitors underbid us by about $10,000 on the Hastings job.” “I just can’t figure it out,” said Kovallas. “It seems we’re either too high or get the job or too low to make any money on half the jobs, we bid anymore. What’s happened?”

Lenko Products manufactures specialized goods to customers’ specifications and operates a job-order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made at the beginning of the year:

Department

Cutting
Machining
Assembly
Total
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Solequin Corporation uses direct labor-hours in all of its divisions as the allocation base for manufacturing overhead.

To compute the predetermined overhead rate, Cristin divided her estimate of the total manufacturing overhead for the coming year. She took her computations to the division’s general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Appliance Division, Lance Jusic, went like this:

Madsen: Here are my calculations for next year’s predetermined overhead rate. If you approve, we can enter the rate into the computer on January and be up and running in the job-order costing system right away this year.

Jusic: Thanks for coming up with the calculation so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is 110,000 hours. How about cutting that to about 105,000 hours?

Madsen: I don’t know if I can do that. The production manager says she will need about 110,000 direct labor-hours during the current year and sales are projected to be higher next year.

Jusic: Cristin, I know all of that. I would still like to reduce the direct labor-hours in the based to something like 105,000 hours. You probably don’t know that I had an agreement

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