Question

Records at Hal’s Accounting Services show the following costs for year 1.

Direct materials and supplies	$	43,000
Employee costs		2,700,000
Total overhead		1,390,000

Production was 25,000 billable hours. Fixed overhead was $800,000.

Assuming no change in billable hours in year 2, direct materials and supplies costs are expected to increase by 10 percent. Direct labor costs are expected to increase by 15 percent. Variable overhead per billable hour is expected to remain the same, but fixed overhead is expected to increase by 5 percent.

Required:

a. Year 2 production is expected to be 20,000 billable hours. What are the estimated direct materials, direct labor, variable overhead, and fixed overhead costs for year 2?

b. Determine the total costs per billable hour for year 1 and year 2.

Answer 1

Solution :-

a) Calculation of estimated direct materials, direct labor, variable overhead, and fixed overhead costs for year 2 :-

Year 1

Direct materials and supplies = $ 43000

Employee costs ( Direct Labor ) = $ 2700000

Total overhead = $ 1390000

Fixed overhead = $ 800000

Variable Overhead = $ 1390000 - $ 800000 = $ 590000

Variable overhead per billable hour = Variable Overhead / Total Billable Hours

= $ 590000 / 25000 = $ 23.6 per Billable hour

Year 2

Direct materials and supplies costs are expected to increase by 10 percent.

Therefore, Estimated Direct Material Costs = $ 43000 * 110% = $ 47300

Direct labor costs are expected to increase by 15 percent

Therefore, Expected Direct labor Costs = $ 2700000 * 115% = $ 3105000

Variable overhead per billable hour is expected to remain the same.

Variable overhead per billable hour =$ 23.6 per Billable hour

Total Billable hours produced = 20000

Total Variable Overhead = 20000 * 23.60 = $ 472000

Fixed overhead is expected to increase by 5 percent.

Fixed Overhead = $ 800000 * 105% = $ 840000

Year 2

Estimated Direct Material Costs	$ 47300
Expected Direct labor Costs	$ 3105000
Total Variable Overhead	$ 472000
Fixed Overhead	$ 840000

b.) Calculation of Total costs per billable hour for Year 1 and Year 2 :-

Particulars	Year 1	Year 2
Billable Hours	25000	20000
Estimated Direct Material Costs (A)	$ 43000	$ 47300
Expected Direct labor Costs (B)	$ 2700000	$ 3105000
Total Variable Overhead (C)	$ 590000	$ 472000
Fixed Overhead (D)	$ 800000	$ 840000
Total Costs (E = A+B+C+D)	$ 4133000	$ 4464300
Billable Hours Produced (F)	25000	20000
Total costs per billable hour	$ 165.32 Per Billable Hour	$ 223.22 Per Billable Hour