CASE 4-59 OVERHEAD ASSIGNMENT: ACTUAL AND NORMAL ACTIVITY COMPARED LO1 LO2 Reynolds Printing Company specialises in wedding invitations. Reynolds uses an actual job-order costing system. An actual overhead rate is calculated at the end of each month using actual direct labour hours and overhead for the month. Once the actual cost of a job is determined, the customer is billed at actual cost plus 50%. During April, Mrs Lucky, a good friend of owner Jane Reynolds, ordered three sets of wedding invitations to be delivered 10 May, 10 June and 10 July, respectively. Reynolds scheduled production for each order on 7 May. 7 June and 7 July, respectively. The orders were assigned job numbers 115, 116 and 117, respectively Reynolds assured Mrs Lucky that she would attend each of her daughters weddings. Out of sympathy and friendship, she also offered a lower price. Instead of cost plus 50%, she gave her a special price of cost plus 25%. Additionally, she agreed to wait until the final wedding to bill for the three jobs. On 15 August, Reynolds asked her accountant to bring her the completed job-order cost sheets for Jobs 115, 116 and 117. She also gave instructions to lower the price as had been agreed upon. The cost sheets revealed the following information JOB 117 $250.00 90.00 400.00 JOB 115 JOB 116 Cost of direct materials $250.00 $250.00 Cost of direct labour (5 hours) 90.00 90.00 400.00 Cost of overhead Total cost Total price 200.00 $740 S925 500 $540 $740 $675 $925 Number of invitations 500 Reynolds could not understand why the overhead costs assigned to Jobs 116 and 117 were so much higher than those for Job 115. She asked for an overhead cost summary sheet for the months of May. June and July, which showed that actual overhead costs were $20000 each month. She also discovered that direct labour hours worked on all jobs were 500 hours in May and 250 hours each in June and July REQUIRED 1 How do you think Mrs Lucky will feel when she receives the bill for the three sets of wedding invitations? Explain how the overhead costs were assigned to each job. Assume that Reynolds's average activity is 500 hours per month and that the company usually experiences overhead costs of $240000 each year. Can you recommend a better way to assign overhead costs to jobs? Recompute the cost of each job and its price given your method of overhead cost assignment. Which method do you think is best? Why? 2 3