Question

1. Fairfax CPA Consultants, (FCC), LLC., firm uses a job costing system with a predetermined indirect cost allocation rate computed as a percentage of direct labor costs. The managing consultant prepared the following plan, or budget, for the year:

Direct labor hours (professionals)………………….15,000 hours

Direct labor costs (professionals)………………….$2,250,000

Office rent……………………………………………..$250,000

Support staff salaries………………………………..$310,000

The managing consultant estimated that this job will require about 250 direct labor hours.

Required:

• Compute FCC’s hourly direct labor cost rate
• Compute FCC’s indirect cost allocation rate
• Compute the predetermined cost for the job
• If FCC earns profit equal to 30% of total direct labor cost, what is the total cost of the job including profit?

Answer 1

1. FCC's hourly direct labor cost rate= TOTAL DIRECT LABOUR COST/ DIRECT LABOUR HOURS

= 2250000/15000

=$150 per hour

2.FCC's indirect cost allocation rate= TOTAL INDIRECT COST/ DIRECT LABOUR COSTS

= 560000/2250000

=0.2489

=24.89%

NOTE: TOTAL INDIRECT COST= OFFICE RENT+SUPPORT STAFF SALARIES

=250000+310000

= $560000

3.Predetermined cost for the job=

Direct cost= 250*150

=$37500

Indirect cost= 24.89% of 37500

=$9333.75

Total cost= 37500+9333.75

=$46833.75

NOTE: The job requires 250 direct labour hours so direct cost will be the direct labour cost rate* direct labour hours

So, rate is 150 as per nO.1

So, 150*250

Indirect cost will be 24.89% of direct cost

4.If FCC earns profit equal to 30% of total direct labor cost, what is the total cost of job including profit.

Profit= 30% of total direct labour cost

=30% of 37500

=$11250

total cost= DIRECT COST+INDIRECT COST+PROFIT

= 37500+9333.75+11250

=$58083.75