Question

BuBu Gump has a cost function for overhead costs of $60,000 per month plus $50 per client hour. In March its overhead allocation rate was calculated assuming 3,000 client hours. Actual overhead costs for July were $220,000, and client hours amounted to 2,800.

A.  Determine the total cost for Job 526 if direct costs were $52,000 and 850 hours were worked for the client.

B.  Provide examples of possible overhead costs for BuBu Gump that are (1) fixed and (2) variable.

C.  Determine the amount of overapplied or underapplied overhead for March.

Answer 1

BuBu Gump has a cost function for overhead costs of $60,000 per month plus $50 per client hour. In March its overhead allocation rate was calculated assuming 3,000 client hours. Actual overhead costs for July were $220,000, and client hours amounted to 2,800.

Estimated overheads = Fixed overheads + Variable overheads

= 60,000 + 3,000 x 50

= $210,000

Overhead application rate = Estimated overheads/Estimated client hours

= 210,000/3,000

= $70 per client hour

A)

Applied overhead to Job 526 = Overhead application rate x Client hours used

= 850 x 70

= $59,500

Direct costs	52,000
Applied overhead	59,500
Total cost	$111,500

B)

Examples of fixed overheads = Rent of the premises, Insurance expense, salary of supervisor

Examples of variable overheads = Utilities, Supplies, Wages of workers

C)

Actual overhead costs = $220,000

Applied overhead = Overhead application rate x Client hours used

= 70 x 2,800

= $196,000

Under applied overhead = Actual overhead costs - Applied overhead

= 220,000 - 196,000

= $24,000