Problems

$[$LO $4-2,4-4]4-39$ Overhead Rates Ennis Inc. $($EI;

www$.$ennis.com$)$ is a Texas$-$based machine$-$intensive printing company that produces business forms. The resources demanded by a specific job depend on the type and amount of paper used and the composition and the construction of the business form. All jobs are constrained by the time necessary on a press and on a collator capable of producing forms at the required size.

EI uses job costing for pricing and bidding decisions. EI uses a separate factory overhead rate for each machine. Costs of machine operator, support personnel, and supplies are identified directly with presses and collators. Other factory overhead costs$-$including insurance, supervision, and office salaries$-$are allocated to machines based on their processing capacity $($the cost driver is the number of feet of business forms per minute$)$ weighted by the maximum paper width and complexity $($the cost driver is the number of colors and other features$)$ that they are capable of handling.

When EI receives a request for a bid on a particular job, the company uses computer software to determine direct materials costs based on the type and quantity of paper. Then, it identifies the least expensive press and collator that are capable of handling the specifications for the business form ordered. The third step is to estimate the total press and collator processing costs by using specific cost$-$driver rates per machine time multiplied by the estimated processing time. The bid price is calculated by adding a standard markup to the total press, collator, and direct materials costs. A higher markup is used for rush jobs and jobs requiring special features.

Required Discuss the strengths and weaknesses of the EI costing system and its strategic implications.