Q27E_b - 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

2. Compute the predicted cost of the Maynard Manufacturing job.

 

Step-by-Step Solution

Answer

The predicted cost of the Maynard manufacturing job is $54,720

Step 1: Estimated direct labor cost

$\begin{array}{c}\mathrm{Estimateddirectlaborcost}=\mathrm{Estimatedlaborhours}\times \mathrm{hourlydirectlaborcostrate}\\ \mathbf{=}\mathbf{180}\text{}\mathbf{hours}\mathbf{\times }\mathbf{\$}\mathbf{160}\mathbf{perhour}\\ =\$28,800\end{array}$

Step 2: Estimated indirect labor cost

$\begin{array}{c}\mathrm{Estimatedindirectlaborcost}=\mathrm{Estimateddirectlaborcost}\times \mathrm{Predeterminedoverheadallocationrate}\left(\%\right)\\ =\$28,800\times 90\%\\ =\$25,920\end{array}$

Step 3: Predicted cost of the Maynard Manufacturing job

$\begin{array}{c}\mathrm{Predictedcost}=\mathrm{Estimateddirectlaborcost}+\mathrm{Estimatedindirectlaborcost}\\ =\$28,800+\$25,920\\ =\$54,720\end{array}$