Question

ProWorks is a website design and consulting firm based in Michigan. The firm uses a job cost system in which each client is a different job. Proworks traces direct labor, software licensing costs, and travel costs directly to each job (client). It divides overhead into two cost pools, "Indirect Labor" and "Office Overhead." It allocates Indirect Labor (support staff salaries) to jobs based on software licensing costs. It allocates Office Overhead (all other overheads) to jobs based on direct labor hours. At the beginning of 2016, managing partner Mark Milici prepared the following estimates:

Direct labor hours $14,000 hours

Direct labor costs $1,400,000

Software licensing costs $50,000

Travel costs $80,000

Support staff salaries $200,000

Computer leases $50,000

Office supplies $30,000

Office rent $60,000

In January, 2016, ProWorks served three clients. Records for the clients appear here:

Dining Corp Hut Shuttle Lucidyne

Direct Labor Hours: 600 hours 50 hours 300 hours

Software licensing costs: $5,000 $500 $2,000

Travel costs: $9,000 $2,000 $0

1) Compute ProWorks overhead cost allocation rates and direct labor rate for 2016.

Answer 1

ProWorks

1. Computation of overhead cost allocation rates and direct labor rate for 2016:

Overhead cost allocation rates:

Indirect Labor Rate -

Indirect Labor (Support Staff Salaries)         $200,000

Basis – Software licensing costs                    $50,000

Indirect labor cost allocation rate                  $200,000/$50,000 = 40% of Software Licensing Costs

Office Overhead Rate –

Office overhead costs –

Computer leases         $50,000

Office Supplies           $30,000

Office Rent                 $60,000

Total Office Overhead costs $140,000

Basis – Direct labor hours      14,000

Office Overhead allocation rate         $140,000/14,000 = $10 per direct labor hour

Direct labor rate –

Estimated Direct Labor costs             $1,400,000

Direct labor hours                  14,000

Direct labor rate         = $1,400,000/14,000 = $100 per direct labor hour

Determination of costs allocated to the three clients:

2. Determination of overhead cost allocation to each of the three clients:
	Dining Corp		Hut Shuttle		Lucidyne
Direct labor hours	600		50		300
Office Overhead cost per direct labor hour	$10		$10		$10
Office Overhead cost		$6,000		$500		$3,000
Direct labor cost per hour	$100		$100		$100
Direct labor cost		$60,000		$5,000		$30,000
Indirect labor rate	40%		40%		40%
Software licensing costs		$5,000		$500		$2,000
Indirect labor cost		$2,000		$200		$800
Travel costs		$9,000		$2,000		$0
Total costs per client		$82,000		$8,200		$35,800