Job-Order Costing and Decision Making

This case involves understanding a job costing situation, pricing policy, making a decision. Read the case details carefully, highlight some important aspects, analyze and draw a conclusion.

Marcel Inc. is a manufacturer of chemical products and minerals/vitamin supplements.  The company was founded in 1986 and is capable of performing all manufacturing, marketing, and sales functions. Its products are sold in United States and some other countries, including Japan, Korea, and New Zealand.   

Marcel Inc. supplies its products either in powder form, or in the form of tablets. Upon receiving an order, the company creates a job cost sheet to accumulate costs from different sources such as materials, labor, and overheads. A material requisition is created to place an order for the material as per the job specification. A chemist usually monitors the specific quantities of material that is needed. A material requisition and the purchase order would be the source documents for extracting information about direct and indirect material being used for each job. The production manager creates a time sheet for different production departments and this would be the source documents to get the labor cost. The overhead costs are charged using direct manufacturing labor as the cost allocation base. Since manufacturing and blending of the Chemical is a highly specialized process that requires utmost precision, an internal system of quality control is in place at every level of material movement, from raw material to finished product. Normally it takes several days to get the finished product from the time of introduction of raw material, blending process, drying process, and eventually getting a final product. A few additional days may be needed for labeling and packaging. The powder or the tablets are then shipped to the customer.

Since each order is customized to meet the special needs of its customers, Marcel uses a job-order costing system.  Recently, Marcel received a request for a 400 kilogram order of the Chemical.  The customer offered to pay $8.50 per kilogram.  Upon receiving the request and the customer's specifications, Luna smith, the cost accountant, requested a load sheet from the company's chemist.  The load sheet prepared showed the following material requirements:

Luna also reviewed past jobs that were similar to the requested order and found that the expected direct labor time was 20 hours.  The production workers at Marcel earn an average of $6.00 per hour plus $5.50 per hour for insurance and additional benefits. 

Purchasing sent Luna a list of prices for the materials needed for the job. 

Overhead is applied using a companywide rate based on the direct labor cost.  The rate for the current period is 120 percent of direct labor cost. 

Whenever a customer requests a bid, Marcel usually estimates the manufacturing costs of the job and then adds a markup of 25 percent.  This markup varies depending on the competition and general economic conditions.  Currently, the industry is thriving, and Marcel is operating at capacity. 

Required:

Analyze the data and calculate the expected total cost and cost per unit of producing 400 kilogram of the Chemical.  Should Marcel accept the price offered by the prospective customer?  Why or why not?Suppose Marcel and the prospective customer agree on a price of cost (as calculated under item 1) plus 25 percent.  What is the gross profit that Marcel expects to earn of the job?Suppose that the actual costs of producing 400 kg of the Chemical were as follows:

Direct materials:

            Aspartic acid         $1,460.00

            Citric acid                    $40.00

            K2CO3                       $769.00

            Rice                              $17.50

Total materials cost             $2286.50

Direct labor                            $250.00

Overhead                               $270.50

What is the actual cost per-unit cost?  The bid price is based on expected costs.  How much did Marcel gain (or lose) because of the actual costs differing from the expected costs?  Suggest some possible reasons why the actual costs differed from the projected costs. 

Assume that the customer had agreed to pay actual manufacturing costs plus 25 percent.  Suppose the actual costs are as described in Requirement 3 with one addition: an underapplied overhead variance is allocated to Cost of Goods Sold and spread across all jobs sold in proportion to their total cost (unadjusted cost of goods sold).  Assume that the underapplied overhead cost added to the job in questions is $50.  Upon seeing the addition of the underapplied overhead in the itemized bill, the customer calls and complains about having to pay for Marcel's inefficient use of overhead costs.  If you were assigned to deal with this customer, what kind of response would you prepare? How would you explain and justify the addition of the underapplied overhead cost to the customer's bill?