Chapter 2, Problem 1AE

To determine

Selling price: The cost incurred by selling the product in the market is known as the selling price.

Fixed overhead cost: The cost which does not vary even though there are changes in the business activity. Some of the costs which come under fixed overhead cost are rent, insurance, salaries etc.

Determine the missing figures. Once the figures are obtained, what is the change in the selling price if the fixed overhead cost is reduced to $300000 provided the total cost of Job 407 should be $2350.

Answer to Problem 1AE

Solution: There is a fall in the selling price since there is a change in the fixed overhead cost.

Explanation of Solution

This calculation should be done in the work book and it is explained below,

Part -1- Finding the missing figures:

	Chapter 2: Applying Excel
	Data
	Mark-up on job cost	75%
		Department
		Milling	Assembly
1	Machine hours	60000	3000
2	Direct Labour Hours	8000	80000
3	Total fixed manufacturing overhead cost	$3,90,000.00	$5,00,000.00
4	Variable manufacturing overhead per machine hour	$2.00	$ -
5	Variable manufacturing overhead per direct labour hour	$ -	$3.75
	Cost Summary for job 407	Department
		Milling	Assembly
6	Machine hours	90	4
7	Direct Labour Hours	5	20
8	Direct Materials	$800.00	$370.00
9	Direct Labour cost	$70.00	$280.00
	Enter a formula into each of the cells marked with? below
	Step 1: Calculate the estimated total manufacturing overhead cost for each department
		Milling	Assembly
10	Total fixed manufacturing overhead (given)	$3,90,000.00	$5,00,000.00
11	Variable manufacturing overhead per machine hour or direct labour hour (given)	$2.00	$3.75
12	Total machine hours or direct labour hours (given)	60000	80000
13	Total Variable manufacturing overhead (11 x 12)	$1,20,000.00	$3,00,000.00
14	Total manufacturing overhead (10 + 13)	$5,10,000.00	$8,00,000.00
	Step 2: Calculate the pre-determined overhead rate in each department
		Milling	Assembly
15	Total manufacturing overhead (14)	$5,10,000.00	$8,00,000.00
16	Total machine hours or direct labour hours (given)	60000	80000
17	Pre-determined overhead rate per machine hour or direct labour hour (15 divided by 16)	$8.50	$10.00
	Step 3: Calculate the amount of overhead applied to both departments to Job 407
		Milling	Assembly
18	Pre-determined overhead rate per machine hour or direct labour hour (17)	$8.50	$10.00
19	Machine hours or direct labour hours for the job (given)	90	20
20	Manufacturing overhead applied (18 x 19)	$ 765.00	$ 200.00
	Step 4: Calculate the total job cost for Job 407
		Milling	Assembly
21	Direct Materials (given)	$800.00	$370.00
22	Direct labour cost (given)	$70.00	$280.00
23	Manufacturing overhead applied (20)	$765.00	$200.00
24	Total cost of Job 407 (21 + 22 + 23)	$1,635.00	$850.00
	Total cost of Job 407 (Milling + Assembly)	$2,485.00
	Step 5: Calculate the selling price for Job 407
		Milling	Assembly
25	Total cost of Job 407 ( 24)	$1,635.00	$850.00
26	Mark-up (24 x 75%)	$1,226.25	$637.50
27	Selling price of Job 407 (25 + 26)	$2,861.25	$1,487.50
	Total Selling Price (Milling + Assembly)	$4,348.75

Part 2: To find the selling price of the job 407 after changes in the fixed overhead cost.

	Chapter 2: Applying Excel
	Data
	Mark-up on job cost	75%
		Department
		Milling	Assembly
1	Machine hours	60000	3000
2	Direct Labour Hours	8000	80000
3	Total fixed manufacturing overhead cost	$3,90,000.00	$5,00,000.00
4	Variable manufacturing overhead per machine hour	$2.00	$ -
5	Variable manufacturing overhead per direct labour hour	$ -	$3.75
	Cost Summary for job 407	Department
		Milling	Assembly
6	Machine hours	90	4
7	Direct Labour Hours	5	20
8	Direct Materials	$800.00	$370.00
9	Direct Labour cost	$70.00	$280.00
	Enter a formula into each of the cells marked with ? Below
	Step 1: Calculate the estimated total manufacturing overhead cost for each department
		Milling	Assembly
10	Total fixed manufacturing overhead (given)	$3,00,000.00	$5,00,000.00
11	Variable manufacturing overhead per machine hour or direct labour hour (given)	$2.00	$3.75
12	Total machine hours or direct labour hours (given)	60000	80000
13	Total Variable manufacturing overhead (11 x 12)	$1,20,000.00	$3,00,000.00
14	Total manufacturing overhead) (10 + 13)	$4,20,000.00	$8,00,000.00
	Step 2: Calculate the pre-determined overhead rate in each department
		Milling	Assembly
15	Total manufacturing overhead (14)	$4,20,000.00	$8,00,000.00
16	Total machine hours or direct labour hours (given)	60000	80000
17	Pre-determined overhead rate per machine hour or direct labour hour (15 divided by 16)	$7.00	$10.00
	Step 3: Calculate the amount of overhead applied to both departments to Job 407
		Milling	Assembly
18	Pre-determined overhead rate per machine hour or direct labour hour (17)	$7.00	$10.00
19	Machine hours or direct labour hours for the job (given)	90	20
20	Manufacturing overhead applied (18 x 19)	$630.00	$200.00
	Step 4: Calculate the total job cost for Job 407
		Milling	Assembly
21	Direct Materials (given)	$800.00	$370.00
22	Direct Labour cost (given)	$70.00	$280.00
23	Manufacturing overhead applied (20)	$630.00	$200.00
24	Total cost of Job 407 (21 + 22 + 23)	$1,500.00	$850.00
	Total cost of Job 407 (Milling + Assembly)	$2,350.00
	Step 5: Calculate the selling price for Job 407
		Milling	Assembly
25	Total cost of Job 407 ( 24)	$1,500.00	$850.00
26	Mark-up (14 x 75%)	$1,125.00	$637.50
27	Selling price of Job 407 (25 + 26 )	$2,625.00	$1,487.50
28	Total Selling Price of Job 407 (Milling + Assembly)	$4,112.50

Conclusion

The selling price of the Job 407 reduces from $4348.75 to $4112.50 since selling price is based on cost plus mark-up method. Hence, it is directly affected by the fall in Fixed Overhead cost.