Problem:

Lennox Company uses a job order costing system. The company uses predetermined overhead rates in applying manufacturing overhead costs to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct labor cost. At the beginning of 2014, the company's management has made the following estimates for the year:

Department A Department B

Direct labour-hours 15,000 30,000

Machine-hours 50,000 12,000

Direct labour cost $80,000 $172,000

Manufacturing overhead 162,500 215,000

Job 145 was initiated into production on August 1 and completed on September 15. The company's cost records show the following information on the job:

Department A Department B

Direct labour-hours 22 40

Machine-hours 80 20

Direct material used $450 $250

Direct labour cost 120 180

Required:

1. Compute the predetermined overhead rates that should be used during 2014 in Department A and B.

2. Compute the total overhead cost applied to job 145.

3. What would be the total cost of job 145? If the job contained 10 units, what would be the cost per unit?

4. At the end of 2014, the records of Lennox Company reveal the following actual cost and operating data for all jobs work on during the year:

Department A Department B

Direct labour hours 14,500 32,000

Machine-hours 48,000 13,000

Direct labour cost $78,000 $174,000

Manufacturing ovherhead 160,000 216,000

Compute the amount of underapplied or overapplied overhead in each department at the end of 2014 and explain most likely reasons why the underapplication or overapplication has taken place.