MANAGEMENT ACCOUNTING

DUPAGE POWDER COATING CASE

ASSIGNMENT 1
1. Based on the limited information, estimate the full cost of the job in the current year. Assume the
company uses one company wide overhead rate.

Ans. Expected total overhead for the current year = $1440000

Expected labor hours in the current year= $65000

Therefore overhead rate= $(1440000/65000) = $22.15 per labor hour

For the job mentioned,

Direct Material cost = $500

Direct labor cost (7 hours*$20/Hour) = $140

Manufacturing overhead (7 hours * $22.15/hour) = $155

Full cost = $795

2. What would have been the cost of the job in part (a) in the prior year?

Ans. In the prior year,

Total overhead=$1080000

Direct labor hours=90000

Therefore, manufacturing overhead= (1080000/90000) = $12 per labor hour

If the mentioned job had taken place in the prior year,

Direct material cost= $500

Direct labor cost (7 hours*$20 per hour) = $140

Manufacturing overhead (7 hours * $12 per hour) = $84

Full cost= $724

3. Explain why the accounting system is making small jobs appear to be more costly in the current year.

Ans. At the start of the current year, Dupage powder coating company purchased and installed a computer
controlled electrostatic powder coating system at a cost of $1800000. With a lifetime of 5 years, the
equipment adds $360000 a year to the manufacturing overhead. That’s why, the overhead manufacturing
rate increased to $22.15 per labor hour from $12 per labor hour in the previous year.
 But the company is still using its old spray booth and manual equipment for small jobs like the job
mentioned in the question. The time taken using this method is more than that taken by the new machine.
That is why, with the increased overhead cost rate, the accounting system is making small jobs appear to be
more costly in the current year.

4. Does the fact that small jobs have a higher cost in the current year suggest that prices of small jobs be
increased?

Ans. Though the cost of small jobs seem to increase, the overall efficiency as well as profit of the company
is increasing after the introduction of the new machine. The cost of small jobs is increasing only because of
the increased overhead cost rate. But the overall labor time is reduced after applying the new machine and
hence labor cost of the whole company is decreasing.

In general, only a small portion of overhead is variable and the remainder is composed of fixed costs (like
depreciation, management cost etc.). So, incremental cost for taking up a new small job will be less than the
calculated overhead cost using the overhead cost rate. As the incremental profit will be greater than the
incremental cost, rejecting the small jobs will affect the company’s financial performance. Again, if the
company increases the cost of small jobs, many customers may not be willing to pay the higher price. As a
result, the company will lose some profit.