Linda Printers is a partnership business, owned by three partners, specialises in printing brochures. Patrick who runs the business owns 40% and other two owns 30% each. Linda uses an actual job-order costing system, and an actual overhead rate is calculated at the end of the month employing direct labour hours. The customer is billed at actual cost plus 40% profit once job is finished. On many occasions, Patrick lost many orders because he was unable to quote price estimates to customers, when asked for.
During January, a local politician placed an order of three sets of brochures to be delivered 15 February, 15 March and 15 April, respectively. Patrick scheduled production for each order on 12 February, 12 March and 12 April, respectively, and Job numbers 200, 201 and 202 were assigned for each order respectively.
Patrick assured the local politician a special price of cost plus 10% instead of cost plus 40% without the knowledge of other two partners of the business. Patrick also agreed to bill for the three jobs at the end of April.
On 27 April, Patrick asked the accountant to prepare the completed job order cost sheet for three jobs, and he instructed accountant to lower the price as had been agreed upon. The cost sheet revealed the following information.
Table 1 – Cost sheet for three Jobs
Cost of direct material
Cost of direct labour (8 hours)
Cost of overhead
Number of brochures
Patrick was at a loss to understand why the overhead costs assigned to Jobs 201 and 202 were so much higher than those for Job 200. To his surprise overhead cost summary sheet revealed that actual overhead costs were $ 30 000 each month. He also discovered that direct labour hours worked on all jobs were 500 hours in February and 300 hours each in March and April.
Patrick decided to refer this matter to a cost consultancy firm and obtain a report as quickly as possible. Suppose that you are the recently graduated management accounting consultant worked for the consultancy firm.
1) Recompute the cost of each job and its price given your method of overhead cost assignment. Explain which method is best.
2) Explanation on the appropriate method that suits the needs of Linda Printers.