Optimizing Cost Allocation and Pricing Strategies: A Job-Order Costing Analysis at Delph Company

QUESTION

Delph Company uses a job-order costing system with a plantwide predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that 57,000 machine-hours would be required for the period’s estimated level of production. It also estimated $1,020,000 of fixed manufacturing overhead cost for the coming period and variable manufacturing overhead of $4.00 per machine-hour. Because Delph has two manufacturing departments—Molding and Fabrication—it is considering replacing its plantwide overhead rate with departmental rates that would also be based on machine-hours. The company gathered the following information to enable calculating departmental overhead rates: Molding Fabrication Total Machine-hours 23,000 34,000 57,000 Fixed manufacturing overhead cost $ 740,000 $ 280,000 $ 1,020,000 Variable manufacturing overhead cost per machine-hour $ 4.00 $ 1.00 During the year, the company had no beginning or ending inventories and it started, completed, and sold only two jobs—Job D-70 and Job C-200. It provided the following information related to those two jobs: Job D-70 Molding Fabrication Total Direct materials cost $ 370,000 $ 320,000 $ 690,000 Direct labor cost $ 200,000 $ 160,000 $ 360,000 Machine-hours 13,000 10,000 23,000 Job C-200 Molding Fabrication Total Direct materials cost $ 260,000 $ 220,000 $ 480,000 Direct labor cost $ 160,000 $ 240,000 $ 400,000 Machine-hours 10,000 24,000 34,000 Assume Delph uses plantwide predetermined overhead rates based on machine-hours. Compute the plantwide predetermined overhead rate. Compute the total manufacturing cost assigned to Job D-70 and Job C-200. If Delph establishes bid prices that are 150% of total manufacturing costs, what bid prices would it have established for Job D-70 and Job C-200? What is Delph’s cost of goods sold for the year?

ANSWER

Optimizing Cost Allocation and Pricing Strategies: A Job-Order Costing Analysis at Delph Company

Job-order costing systems are indispensable tools for manufacturing companies seeking to allocate costs accurately to individual projects or jobs. Delph Company, a hypothetical firm, provides us with an illustrative example of how such a system works and the decisions it prompts. In this essay, we’ll explore Delph’s job-order costing system and answer key questions, with a focus on optimizing SEO (Search Engine Optimization).

Plantwide Predetermined Overhead Rate: Delph Company operates with a plantwide predetermined overhead rate, a common approach in job-order costing. This rate is calculated as Estimated Total Manufacturing Overhead Costs divided by Estimated Total Machine-Hours. Delph’s rate is determined to be $17.89 per machine-hour, a crucial figure used in the allocation of overhead costs to jobs.

Total Manufacturing Cost Allocation: The heart of job-order costing is the allocation of costs to specific jobs. Delph provides data for two jobs, Job D-70 and Job C-200. To calculate the total manufacturing cost for these jobs, we use the predetermined overhead rate in conjunction with direct materials and direct labor costs. Job D-70 incurs a total manufacturing cost of $1,461,470, while Job C-200’s total manufacturing cost is $1,488,060.

Bid Prices Determination: Delph, like many businesses, sets bid prices for its projects to ensure profitability. In this case, Delph’s pricing strategy involves establishing bid prices at 150% of the total manufacturing costs. Thus, the bid prices for Job D-70 and Job C-200 are $2,192,205 and $2,232,090, respectively. Accurate cost allocation plays a pivotal role in determining competitive and sustainable bid prices, a critical aspect of any manufacturing business’s success.

 Cost of Goods Sold (COGS) Calculation: The Cost of Goods Sold (COGS) is a vital financial metric for any company. In Delph’s case, the company provided data indicating that there were no beginning or ending inventories during the year. Therefore, COGS for the year is simply the sum of the total manufacturing costs for the two jobs, which amounts to $2,949,530. Accurate COGS calculation is essential for financial reporting and taxation purposes.

In conclusion, Delph Company’s use of a plantwide predetermined overhead rate based on machine-hours is a practical approach for allocating overhead costs to jobs. It ensures that costs are distributed accurately, allowing for informed pricing decisions. Delph’s decision to set bid prices at 150% of total manufacturing costs demonstrates how cost allocation influences the company’s revenue and profitability. Moreover, understanding the COGS for the year is crucial for financial reporting and assessing the company’s financial health.

In a competitive business environment, where every dollar matters, effective job-order costing systems are indispensable for companies like Delph. They enable sound financial decision-making, pricing strategies, and the ability to adapt to ever-changing market conditions. Therefore, optimizing cost allocation and cost-related decisions is pivotal for Delph’s continued success in the manufacturing industry.