Question

The Red Mill Inn is in need of a new roof. A local contractor, Jack Hammer, has been asked to
submit a bid to do the work. Jack measured the roof and determined he would need 50 cases
of roofing material. The cost per case is $45. Jack also determined it would take a four-man
crew four 8-hour work days to complete the job. Each worker is paid $15 per hour. Before the
year began, Jack estimated his total overhead costs to be $152,000. He applies overhead to jobs
based on the amount of direct labour hours the job takes. Jack estimated the total direct labour
hours for the year to be 10,000 hours.
a) What is Jack's predetermined overhead rate for the year?
b) How much overhead was charged to the Red Mill Inn job?
c) What was the total cost of the Red Mill Inn job?
	DM
	DL
	OH
	Total Cost
d) If Jack charges his customers an amount equal to 25% above his cost, what would his
bid to replace the roof on the Red Mill Inn?

Answer 1

a) Jack's predetermined overhead rate = Total estimated overhead costs/Total estimated direct labour hours

= $152,000/10,000 hours = $15.20 per hour

b) Jack applies overhead to jobs based on the amount of direct labour hours the job takes, hence first of all we need to calculate the amount of direct labor hours required for Red Mill Inn job.

Direct labor hours for Red Mill Inn job = 4 man*4 days*8 hours = 128 hours

Predetermined overhead rate = $15.20 per hour

Overhead cost applied to Red Mill Inn job = Direct labor hours*Predetermined overhead rate

= 128 hours*$15.20 per hour = $1,945.60

c)   Calculation of total cost for Red Mill Inn job (Amount in $)

Direct Material (DM) (50 cases*$45 per case)	2,250
Direct Labor (DL) (128 hours*$15 per hour)	1,920
Overhead cost applied to job	1,945.60
Total cost	6,115.60

d) Bid of Jack for Red Mill Inn Job = Total cost for Job + 25% of total cost = $6,115.60 + (25% of $6,115.60) = $6,115.60+$1,528.90 = $7,644.50 Thus Jack's bid to replace the roof on the Red Mill Inn will be $7,644.50