Vanessa Noel, owner and manager of Noel Draperies and Window Treatments, has been receiving some complaints from her loyal clientele of interior decorators and home décor consultants.
For example, one of her loyal customers, Phoebe, wanted to know why she was being charged a much higher price for an order that was almost
identical to an order she placed last year. Phoebe felt that the price hike was simply not justified. Although Vanessa, when responding to Phoebe’s complaint, blamed the price hike on the rising price of materials, she herself was a bit perplexed and decided to look into the matter. Vanessa asked her accountant to prepare a report for her summarizing cost and pricing data for the last three years. The accountant presented this information in the following table:
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Vanessa believes that the last few years have been fairly representative of business volume in general. Moreover, Vanessa believes the average of the direct labor cost for years 1 and 2 is a fair estimate of her “normal” volume of business.
Vanessa next turns her attention to how she prices incoming jobs. When her company receives an order, Vanessa estimates the direct labor and material costs for the job, and then she applies an overhead amount to the job. Each year, the firm computes a budgeted overhead rate per dollar of direct labor. The company then prepares the order quote by adding direct material costs, direct labor costs, and applied overhead, and a 50% markup on the total cost.
Vanessa retrieves information corresponding to Phoebe’s order in year 2, and compares it with the price quote the company prepared for Phoebe for her most recent order in year 3. Vanessa is not an accountant, but she is a good manager and can understand why Phoebe complained.
Required:
a. Compute the total overhead application rates for years 1, 2, and 3.
b. Compute the overapplied or underapplied overhead for year 1 and year 2.
c. The following information pertains to Phoebe’s order in year 2, and her current order for year 3, which is identical to the year 2 order in terms of the draperies and the window treatments.
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Compute the price charged for the year 2 order and the price quoted for the year 3 order.