Problem - Custom Auto Parts manufactures parts to order for antique cars. Custom Auto Parts makes everything from fenders to engine blocks. Each customer order is treated as a job. The company currently has two jobs, No. 9823 and No. 9824 that are complete, although overhead has not yet been applied. The company wants to know what each job's cost would be under alternative overhead allocation rates based on: (1) direct labor cost, (2) direct labor hours, and (3) machine hours. Estimates for this year are as follows:
Direct labor cost $300,000
Direct labor hours 25,000
Machine hours 8,000
Overhead costs $200,000
Depreciation on machinery accounts for 75 percent of the overhead costs. The job-cost sheets show:
Job 9823 Job 9824
Direct material $1,000 $2,000
Direct labor cost $1,400 $1,400
Direct labor hours 150 130
Machine hours 130 270
Determine the overhead allocation rate under the three suggested allocation bases. Round to the two decimal places.
Calculate the cost of Job 9823 and Job 9824 using each of the three bases. Round to two decimal places.
Discuss which allocation base appears preferable.