Speedy Auto Repairs uses a job-order costing system. The company’s direct materials consist of replacement parts installed in customer vehicles, and its direct labor consists of the mechanics’ hourly wages. Speedy’s overhead costs include various items, such as the shop manager’s salary, depreciation of equipment, utilities, insurance, and magazine subscriptions and refreshments for the waiting room. The company applies all of its overhead costs to jobs based on direct labor-hours. At the beginning of the year, it made the following estimates:
Direct labor-hours required to support estimated output 20,000
Fixed overhead cost $ 350,000
Variable overhead cost per direct labor-hour $ 1.00
Required:
1. Compute the predetermined overhead rate.
2. During the year, Mr. Wilkes brought in his vehicle to replace his brakes, spark plugs, and tires. The following information was available with respect to his job:
Direct materials $ 590
Direct labor cost $ 109
Direct labor-hours used 6
Compute Mr. Wilkes’ total job cost.
3. If Speedy establishes its selling prices using a markup percentage of 40% of its total job cost, then how much would it have charged Mr. Wilkes?

Instructions are below.

Explanation:

Giving the following information:

Direct labor-hours required to support estimated output 20,000

Fixed overhead cost $ 350,000

Variable overhead cost per direct labor-hour $ 1.00

First, we need to calculate the predetermined overhead rate:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= (350,000/20,000) + 1

Predetermined manufacturing overhead rate= $18.5 per direct labor hour

Job:

Direct materials $ 590

Direct labor cost $ 109

Direct labor-hours used 6

Total cost= 590 + 109 + 6*18.5

Total cost= $810

Finally, the selling price:

Selling price= 810*1.4= $1,134

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