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Integrative Case 7-68 (Algo) Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision Making (LO 7-2, 3)

O'Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O'Leary uses a normal job costing system. Direct labor at O'Leary is paid $32 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows.

Year 1Year 2Direct labor-hours worked70,00057,000Manufacturing overhead costs incurredIndirect labor$2,880,000$2,280,000Employee benefits1,050,000855,000Supplies700,000570,000Power657,000552,000Heat and light144,000144,000Supervision784,950665,250Depreciation2,072,5002,072,500Property taxes and insurance811,550841,250Total manufacturing overhead costs$9,100,000$7,980,000

At the beginning of year 3, O'Leary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, year 2. It is scheduled to ship on January 7, year 3. Job MC-275 is still in progress.For the purpose of computing the predetermined overhead rate, O'Leary uses the previous year's actual overhead rate.Data on direct material costs and direct labor-hours for these jobs in year 2 follow.

Job MC-270Job MC-275Direct material costs$273,000$498,000Direct labor-hours2,650hours3,350hours

During year 3, O'Leary incurred the following direct material costs and direct labor-hours for all jobs worked in year 3, including the completion of Job MC-275.

Direct material costs$11,843,000Direct labor-hours77,000Actual manufacturing overhead$9,840,000

At the end of year 3, there were four jobs that had not yet shipped. Data on these jobs follow.

MC-389MC-390MC-397MC-399Direct materials$46,200$70,000$106,500$31,900Direct labor-hours1,770 hours2,850 hours6,250 hours1,450 hoursJob statusFinishedFinishedIn progressIn progress

Required:

a.What was the amount in the beginning Finished Goods and beginning Work-in-Process accounts for year 3?

b.O'Leary incurred direct materials costs of $60,000 and used an additional 600 hours in year 3 to complete job MC-275. What was the final (total) cost charged to job MC-275?

c.What was over- or underapplied overhead for year 3?

d.O'Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the journal entry to prorate the over- or underapplied overhead.

e.A customer has asked O'Leary to bid on a job to be completed in year 4. O'Leary estimates that the job will require about $94,000 in direct materials and 5,150 direct labor-hours. Because of the economy, O'Leary expects demand for its services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O'Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O'Leary can bid on the job and still not incur a loss?

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