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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 $17 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 1
Year 2
Direct labor hours worked 69,000
54,000
Manufacturing Overhead Cost incurred Indirect labor
$2,767,000
$1,890,500
Employee Benefits 1,042,000
817,000
Supplies
697,000
547,000
Power 552,700
582,700
Heat and Light
138,700
138,700
Supervision 716,950
776,950
Depreciation
1,983,200
1,983,200
Property Taxes & Insurance 751,950
751,950
____________________________________________________________
Total Manufacturing Overhead Cost
$8,649,500
$7,111,000
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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. The predetermined rate in year 2
was $130 per direct labor hour. Data on direct material costs and
direct labor hours for these jobs in year 2 follow:
Job MC 270
Job
MC 275
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Direct Materials Cost
$ 270,000
$495,700
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Direct Labor Hours
2,570 hours
3,270 hours
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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 . . . . . . . . . . . . . . . . . .
$11,910,000
Direct labor hours . . . . . . . . . . . . . . . . . . . .
74,700
Actual manufacturing overhead . . . . . . . . . .
$9,113,000
For the purpose of computing the predetermined overhead rate,
O’Leary uses the previous year’s actual overhead rate. At the end
of year 3, there were four jobs that had not yet shipped. Data on
these jobs follow:
MC 389
MC 390
MC 397
MC 399
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Direct Materials $
42,900
67,700
104,200
29,600
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Direct Labor Hours
1,810
2,672
4,606
1,370
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Job Status
Finished
Finished
In Progress
In Progress
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Required:
a. What was the amount in the beginning Finished Goods and
beginning Work In Process accounts for year 3?
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b. O’Leary incurred direct materials cost of $57,700 and used an
additional 307 hours in year 3 to complete job MC 275. What was the
final (total) cost charged to job MC 275?
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c. What was over or underapplied overhead for year 3?
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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 computed in requirement (c).
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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 $93,200
in direct materials and 5,070 direct labor hours. Because of the
economy, O’Leary expects demand for their 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 aloss?