Matai Print & Pack Ltd: overhead recovery, a quoted job and a cheaper competitor
Matai Print & Pack Ltd runs one production plant in Porirua and prices print jobs from a job costing system with a plant-wide overhead recovery rate based on direct labour hours. The budget for the year ending 31 March 2026 is:
- budgeted manufacturing overhead NZD480,000
- budgeted direct labour hours 24,000
Job 447, a run of 40,000 brochures for a local council, has been costed as:
- direct materials NZD6,400
- direct labour 180 hours at NZD42.00 per hour
- overhead applied at the recovery rate
- mark-up of 25% on total job cost
Nine-month actual results show overhead of NZD392,000 and 17,700 direct labour hours. The production manager reports two major machine breakdowns, idle time and a subcontracted print run, and asks whether the system is 'charging jobs the right amount'. A competitor has quoted the council NZD15,900 for the same job.
1. Calculate the predetermined overhead recovery rate, the full cost and quoted price of Job 447, and the overhead under- or over-recovery to date. Explain what the recovery position means.
Read the worked answer
Recovery rate
480,000 ÷ 24,000 DLH = NZD20.00 per direct labour hour
Job 447
- Direct materials: 6,400
- Direct labour: 180 × 42.00 = 7,560
- Overhead applied: 180 × 20.00 = 3,600
- Total job cost: 17,560
- Mark-up 25%: 4,390
- Quoted price: 21,950
Recovery to date
- Overhead applied: 17,700 × 20.00 = 354,000
- Actual overhead: 392,000
- Under-recovery: 38,000
The budget expects 18,000 hours in nine months (480,000 × 9/12 = 360,000 of overhead); actual overhead is 32,000 above that on 300 fewer hours. Actual rate = 392,000 ÷ 17,700 = NZD22.15 per hour, not 20.00.
Why
Under-recovery has two possible causes and both are present here:
- Spending - actual overhead per hour is higher, partly because a print run was subcontracted at a premium the standard overhead rate never anticipated.
- Volume/idle time - breakdowns mean fewer productive direct labour hours to absorb a largely fixed overhead pool. Spreading a fixed pool over fewer hours raises the true cost per hour.
Under NZ IAS 2, fixed overhead is allocated on normal capacity; abnormal idle capacity and abnormal waste must not be carried in inventory but expensed in the period. So the 38,000 cannot simply be capitalised into work in progress - most of it belongs in this year's result, which will hit reported profit.
2. A competitor has quoted the council NZD15,900. Explain why Matai should not automatically match that price, using the under-recovery evidence.
Read the worked answer
The temptation
Matai's full cost is 17,560 and its quote is 21,950 - the competitor's 15,900 is below Matai's full cost. Matching it looks necessary to win the job, but the comparison is not like-for-like.
What the job cost does and does not tell us
- The 3,600 overhead applied is based on a budgeted rate of 20.00. Evidence to date suggests the real rate is closer to 22.15, giving applied overhead of about 3,987 and a cost nearer 17,947. Job costs are therefore likely understated, and any price built on them is too low, not too high.
- The competitor may have different equipment, lower labour rates, a different overhead structure, or may be buying the work to fill capacity. Their cost structure is not Matai's, and Matai cannot infer its own cost from their price.
- Nothing is known about the competitor's reliability, turnaround, or whether their quote excludes items Matai's includes.
Relevant reasoning
Full cost is a starting point, not a bidding rule. The floor for this job is the relevant (incremental) cost - materials, labour and any avoidable overhead - because the fixed overhead is incurred whether or not the brochure is printed. The decision then depends on spare capacity: if the plant is idle, any contribution above relevant cost adds profit; if the job displaces other work, the lost contribution is the true cost of accepting.
Conclusion
Do not match blindly. Establish the relevant cost, check capacity, and either hold the price or decline - but first fix the cost system, because Matai currently cannot prove its prices are profitable.
3. Recommend what Matai should do about its overhead recovery rate and job pricing for the next year.
Read the worked answer
1. Re-estimate the budget properly
Rebuild the overhead budget from actual cost behaviour, separating fixed from variable overhead. Establish normal capacity realistically - 24,000 hours was never achievable with the current breakdown record and product mix, so the rate was set too low from the start.
2. Consider departmental rates
The plant-wide rate lets one department's costs be recovered by another's hours - for example, prepress labour hours absorbing press overhead. If the departments have very different overhead-to-labour ratios, departmental recovery rates (or a machine-hour basis for the press, which is where the overhead actually sits) give materially different and more accurate job costs. That is a real cause of the competitor being cheaper on this type of job.
3. Report recovery monthly
Track applied versus actual overhead each month with a variance split into spending and volume variances. A 38,000 under-recovery discovered in nine months is a control failure: it should have been visible in month three, when prices could still be adjusted.
4. Investigate the causes, not just the rate
Machine breakdowns, idle time and subcontracting are the drivers. Addressing preventive maintenance and scheduling may cost less than the margin lost on mispriced jobs. Subcontracting should be costed as a direct cost of the job, not buried in the overhead pool.
5. Set pricing policy
Use full cost as a guide for normal work, but require a documented relevant-cost floor for competitive or fill-in jobs, with manager sign-off - and review the 25% mark-up against actual margins, since a 25% mark-up on an understated cost may not deliver the intended return.