Question

Jackson Painting Co. paints the interiors of houses. During the year, they expect to paint 10,000 square meters (m²) of space over 20 jobs at a cost of $548,000. Jackson does not have separate categories for Direct Labour and Direct Materials, and instead captures all costs in a single overhead pool. An examination of overhead costs revealed the following:

Labour: total costs $300,000

• 80% of the labour is spent painting, 15% is spent preparing each site, and 5% is spent on billing and customer relations.

Materials: total costs $248,000

A breakdown of materials costs is as follows:

• Paint and brushes: $210,000
• Plaster, tape, cleaners, and other site preparation materials: $20,000
• Other materials: $18,000 (split evening between painting and site preparation)

The industry standard is to quote jobs at “Cost + 10%”; meaning 10% profit is added to costs to calculate the total price to be quoted to customers.

Required:

1. How much does Jackson expect it to charge for a 2,000 m² job assuming that all costs are allocated on the basis of m².
2. How much does Jackson expect it to quote for a 2,000 m² job assuming that all costs are allocated on an Activity Based Costing system based on separate costs pools for “Painting” and “Job Support”. Painting costs are driven by m².   Job Support costs are driven by the number of jobs. Each job requires site-preparation. Site preparation costs tend to be equal for each job regardless of the amount of painting required. Each job also requires labour costs for billing and customer relations, and related materials.
3. Jackson wants to continue using a single cost pool to allocate costs (and rejects Activity Based Costing). Jackson’s competitors have similar costs and have adopted Activity Base Costing.   Next year, what is likely to happen when Jackson bids on a Big Job (over 2,000 m2) and a Small jobs (under 200 m2)?

Answer 1

Solution A:
Predetermined overhead rate per M2 (Estimated overhead / Estimated M2)	$54.80
Total cost allocated to 2000 M2 Job ($54.80 *2000)	$109,600.00
Profit (10%)	$10,960.00
Expected charge for 2000 M2 Job	$120,560.00
Solution B:
Cost allocated to Painting Cost Pools and per square meter rate of painting:
Labor	$240,000.00
Paint and Burshes	$210,000.00
Other materials	$9,000.00
Cost allocated to Painting Cost Pools	$459,000.00
Total expected Square meter jobs	$10,000.00
Painting cost per square meter	$45.90
Cost allocated to Job Support and cost per job:
Labor	$60,000.00
Plaster, tape, cleaners, and other site preparation materials	$20,000.00
Other materials	$9,000.00
Cost allocated to Job Support	$89,000.00
Nos of Jobs	20
Cost of job support per job	$4,450.00
Computation of price to be charged to 2000 M2 Job:
Painting costs (2000*$45.90)	$91,800.00
Job Support	$4,450.00
Total costs	$96,250.00
Profit (10%)	$9,625.00
Expected charge for 2000 M2 Job	$105,875.00
Solution c:
When Jackson bid on Big job (2000 M2) and small Job (200 M2) next year, it will loose the big job and Win the small job.