Q27E_a - Horngren'S Financial And Managerial Accounting

Question

Chance Realtors, a real estate consulting firm, specializes in advising companies on potential new plant sites. The company uses a job order costing system with a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Andrew Chance prepared the following budget for the year:

Direct labor hours (professionals)	13,750 hours
Direct labor cost (professionals)	$2,200,000
Office rent	330,000
Support staff salaries	1,200,000
Utilities	450,000

Maynard Manufacturing, Inc. is inviting several consultants to bid for work. Andrew Chance wants to submit a bid. He estimates that this job will require about 180 direct labor hours.

Requirements

1. Compute Chance Realtors’ (a) hourly direct labor cost rate and (b) predetermined overhead allocation rate.

Step-by-Step Solution

Answer

a. The hourly direct labot cost rate is $160

b. The predetermined overhead allocation rate (in %) is 90%

Step 1: Hourly direct labor cost rate

$\begin{array}{c}\mathbf{Hourlydirectlaborcostrate}\mathbf{=}\frac{\mathrm{Directlaborcost}}{\mathrm{Directlaborhours}}\\ \mathbf{=}\frac{\$2,200,000}{13,750}\\ =\$160\end{array}$

Step 2: Estimated total indirect cost

$\begin{array}{c}\mathrm{Estimatedtotalindirectcosts}=\mathrm{Officerent}+\mathrm{Supportstaffsalaries}+\mathrm{Utilities}\\ =\$330,000+\$1,200,000+\$450,000\\ =\$1,980,000\end{array}$

Step 3: The predetermined overhead allocation rate

$\begin{array}{c}\mathbf{Predeterminedoverheadallocationrate}\mathbf{=}\frac{\mathrm{Estimatedtotalindirectcost}}{\mathrm{Directlaborcost}}\\ \mathbf{=}\frac{\$1,980,000}{\$2,200,000}\\ =90\%\end{array}$