Q33PGA - Horngren'S Financial And Managerial Accounting

Question

Bluebird Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client is a different job. Bluebird Design assigns direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Sally Simone prepared the following budget estimates:

Direct labor hours (Professionals)	7,500 hours
Direct labor costs (Professionals)	\(1,500,000
Support staff salaries	464,000
Computer leases	45,000
Office supplies	29,000
Office rent	62,000

In November 2018, Bluebird Design served several clients. Records for two clients appear here:

	Delightful treats	Melva chocolates
Direct labor hours	500 hours	400 hours
Software licensing costs	\)3,500	$200
Travel costs	5,000	0

Requirements

1. Compute Bluebird Design’s direct labor rate and its predetermined overhead allocation rate for 2018.

2. Compute the total cost of each job.

3. If Simone wants to earn profits equal to 50% of service revenue, what fee should she charge each of these two clients?

4. Why does Bluebird Design assign costs to jobs?

Step-by-Step Solution

Answer

1. The direct labor rate of Bluebird  Design’s is $200 per hour, and the predetermined overhead allocation rate is 40%.

 

2. The total cost of the Delighful treats is $148,500, and  the Melva chocolates is$112,200. 

 

3. If Simone wants to earn a profit equal to 50% of service revenue, she charges $297,000 from the Delightful   treat and $224,400 from Melva chocolates. 

 

4. The  costing system is used by the companies to assign the total cost of manufacturing to the product to ensure that the price of the product covers the total cost and provides a profit. Hence, the Bluebird Design assigns the costs to the job to identify the price of the job.

Step 1: Meaning of Job Order costing System

A job order costing system is used by the companies which are engaged in manufacturing unique products in small quantities to determine the cost of manufacturing the products. 

Step 2: Direct labor rate

$\begin{array}{c}\mathrm{Direct} \mathrm{labor} \mathrm{rate}=\frac{{\displaystyle \mathrm{Budgeted} \mathrm{Direct} \mathrm{labor} \mathrm{cost}}}{{\displaystyle \mathrm{Budgeted} \mathrm{direct} \mathrm{labor} \mathrm{hours}}}\\ =\frac{\mathrm{\$}1,500,000}{7,500}\\ =\mathrm{\$}200\end{array}$

Step 3: Total estimated overhead costs

$\begin{array}{c}\mathrm{Total} \mathrm{estimated} \mathrm{overhead} \mathrm{costs}=\mathrm{Support} \mathrm{staff} \mathrm{salaries}+\mathrm{Computer} \mathrm{leases}+\mathrm{Office} \mathrm{supplies}+\mathrm{Office} \mathrm{rent}\\ =\mathrm{\$}464,000+\mathrm{\$}45,000+\mathrm{\$}29,000+\mathrm{\$}62,000\\ =\mathrm{\$}600,000\end{array}$

Step 4: The predetermined overhead allocation rate for 2018

$\begin{array}{c}\mathrm{Predetermined} \mathrm{overhead} \mathrm{allocation} \mathrm{rate}=\frac{\mathrm{Total} \mathrm{estimated} \mathrm{overhead} \mathrm{costs}}{\mathrm{Budgeted} \mathrm{direct} \mathrm{labor} \mathrm{costs}}\\ =\frac{\mathrm{\$}600,000}{\mathrm{\$}1,500,000}\\ =40\mathrm{\%}\end{array}$

Step 5: Total cost of Delighful treats and Melva chocolates

Particulars	Delightful treats	Melva chocolates
Direct labor cost	$100,000 (500 hr x $200)	$80,000 (400 hr x $200)
Software licensing cost	3,500	200
Travel cost	5,000	0
Manufacturing overhead  (40% of direct labor cost)	40,000	32,000
Total cost	148,500	112,200

Step 6: Fess should be charged to the Delightful treat to earn 50% of the revenue

Let the sales revenue be A. 

$\begin{array}{c}\mathrm{Revenue}=\mathrm{Total} \mathrm{cost}+\mathrm{Expected} \mathrm{profit}\\ \mathrm{A}=\mathrm{\$}148,500+50\mathrm{\%} \mathrm{of} \mathrm{A}\\ \mathrm{A}=\mathrm{\$}297,000\end{array}$

Step 7: Fess should be charged to the Melva chocolates to earn 50% of the revenue

$\begin{array}{c}\mathrm{Revenue}=\mathrm{Total} \mathrm{cost}+\mathrm{Expected} \mathrm{profit}\\ \mathrm{A}=\mathrm{\$}112,200+50\mathrm{\%} \mathrm{of} \mathrm{A}\\ \mathrm{A}=\mathrm{\$}224,000\end{array}$