Jensen Marine Supplies Inc. uses time and material pricing. The Mechanics Department, which anticipates 20,000 direct labour hours of activity, has the following data: $\begin{array}{l}
\text { Annual overhead costs: }\
\begin{array} { l r }
\text { Material handling and storage } & \$ 20,000 \
\text { Other overhead costs } & 60,000 \
\text { Annual cost of materials used } & 200,000 \
\text { Labour rate per hour, including fringe benefits } & 20 \
\text { Hourly charge to achieve profit margin } & 15
\end{array}
\end{array}$ The amount to be added to each dollar of material cost to obtain the total material charge is:
A)$0.09.
B)$0.10.
C)$0.25.
D)$0.30.
E)$0.40.

Question

Jensen Marine Supplies Inc. uses time and material pricing. The Mechanics Department, which anticipates 20,000 direct labour hours of activity, has the following data: $\begin{array}{l}
\text { Annual overhead costs: }\
\begin{array} { l r } 
\text { Material handling and storage } & \$ 20,000 \
\text { Other overhead costs } & 60,000 \
\text { Annual cost of materials used } & 200,000 \
\text { Labour rate per hour, including fringe benefits } & 20 \
\text { Hourly charge to achieve profit margin } & 15
\end{array}
\end{array}$ The amount to be added to each dollar of material cost to obtain the total material charge is:
A)$0.09.
B)$0.10.
C)$0.25.
D)$0.30.
E)$0.40.

Quizplus · Accepted Answer

To calculate the material charge, Jensen Marine Supplies Inc. adds a certain amount per dollar of material cost to the actual cost of materials used. This amount is determined by dividing the total annual overhead costs by the total labour hours anticipated for the year.

Total overhead costs = Material handling and storage + Other overhead costs = $20,000 + $60,000 = $80,000

Material charge per direct labour hour = Total overhead costs / Direct labour hours anticipated for the year = $80,000 / 20,000 = $4

To determine the amount to be added to each dollar of material cost, we divide the material charge per direct labour hour by the hourly labour rate, including fringe benefits.

Amount to be added to each dollar of material cost = Material charge per direct labour hour / Hourly labour rate = $4 / $20 = $0.20

However, this amount includes the hourly charge to achieve the profit margin, which must be subtracted.

Amount to be added to each dollar of material cost = $0.20 - $0.15 = $0.05

Therefore, the amount to be added to each dollar of material cost to obtain the total material charge is $0.05, which corresponds to choice (B).

Jensen Marine Supplies Inc The Amount to Be Added to Each Dollar of Material