Problem -
Ruakura Printers Co. specialises in wedding invitation packages. Ruakura uses an actual job-order costing system. An Actual overhead rate is calculated at the end of each month using actual direct labour hours and overhead for the month. Once the actual cost of a job is determined, the customer is billed at actual cost plus 50%.
During April, Mrs. Huntly, a good friend of owner Judy Ruakura, ordered three sets of wedding packages to be delivered 10 May, 10 June and 10 July, respectively, for each of her three daughters. Ruakura scheduled production for each order on 7 May, 7June, and 7 July, respectively. The package orders were assigned Job numbers 115, 116 and 117, respectively.
Judy assured Mrs. Huntly that she would attend each of her daughters' weddings. Out of sympathy and friendship, she also offered a lower price. Instead of cost plus 50%, she gave her a special price of cost plus 25%. Additionally, she agreed to wait until the final wedding to bill for the three jobs.
On 15 August, Judy asked her accountant to bring her the completed job-order cost sheets for Jobs 115, 116 and 117. She also gave instructions to lower the price as had been agreed upon. The cost sheets reveal the following information:
|
JOB
|
115
|
116
|
117
|
|
Direct material cost $
|
250
|
250
|
250
|
|
Direct labour
|
90
|
90
|
90
|
|
Overhead cost
|
200
|
400
|
400
|
|
Total cost
|
540
|
740
|
740
|
|
Total price
|
675
|
925
|
925
|
|
Number of Invitations
|
500
|
500
|
500
|
Judy could not understand why the overhead costs assigned to Jobs 116 and 117 were so much higher than those of Job 115. She asked for an overhead cost summary sheet for the months of May, June and July, which showed that actual overhead costs were $20,000 for each month. She also discovered that direct labour worked on all jobs were 500 hours in May and 250 hours each in June and July.
Required:
1. How do you think Mrs. Huntly will feel when she receives the bill for the three sets of wedding invitations and, if you are Judy, how would you explain the bill?
2. Explain, with suitably coherent workings, how the overhead costs might have been assigned to each job in this case?
3. Assume that Ruakura's average activity is 500 hours per month and that the company usually experiences overhead costs of $240,000 each year. Can you recommend a better way to assign overhead costs to jobs from the methods you have learnt?
4. Recalculate the costs of each job and its price given your method of overhead cost assignment.
5. Compare and contrast the pros and cons of your method against the method used by Ruakura.