Question

Business Decision Case Elizabeth Flanigan and Associates is an engineering and design firm that

specializes in developing plans for recycling plants for municipalities. The firm uses a job costing

system to accumulate the cost associated with each design project. Flanigan employs three levels of

employee: senior engineers, associate engineers, and clerical staff. The salary cost of the senior en-

gineers and the associate engineers is assigned to each project as direct labor. The salary cost of the

clerical staff is included in overhead, along with the cost of engineering supplies, automobile travel,

and equipment depreciation. The cost of airline travel, motels, building permits, and fees from other

consultants is charged to each project as direct material. Overhead is applied to projects using a pre-

determined overhead rate based on total engineering hours. The rate for 2014 is $5 per hour.

The six different salary levels for 2015 for the employees of Elizabeth Flanigan and Associates

are listed below. The hourly rate is determined by dividing the yearly salary by 2,000 hours per year.

Senior engineer

Level 1: $44,000 per year ($22 per hour)

Level 2: $36,000 per year ($18 per hour)

Associate engineer

Level 3: $30,000 per year ($15 per hour)

Level 4: $24,000 per year ($12 per hour)

Clerical staff

Level 5: $16,000 per year ($8 per hour)

Level 6: $12,000 per year ($6 per hour)

The billings that are sent to the municipalities for engineering services utilize cost-plus billing.

Typically, the total costs accumulated for a project (direct material, direct labor, and overhead) are

multiplied by 140% to determine the amount of the billing. The difference between the billed amount

and the accumulated cost is the “plus” in cost plus.

During March 2015, Flanigan accumulated the following information related to Job 295 for

Johnson Creek City:

Senior engineer hours

Level 1 . . . . . . . . . . . . . . . . . . . . . . . . 52

Level 2 . . . . . . . . . . . . . . . . . . . . . . . . 84

Associate engineer hours

Level 3 . . . . . . . . . . . . . . . . . . . . . . . . 106

Level 4 . . . . . . . . . . . . . . . . . . . . . . . . 44

Clerical hours

Level 5 . . . . . . . . . . . . . . . . . . . . . . . . 20

Level 6 . . . . . . . . . . . . . . . . . . . . . . . . 66

Building permits . . . . . . . . . . . . . . . . $1,500

Airline travel and motel . . . . . . . . . . $865

Discuss the next two problems:

Required

a. What amount should be billed to Johnson Creek City for March 2015?

b. How much profit was earned on Job 295 during March 2015?

Answer 1

a. Amount billed to Johonson Creek City = $11,997

Working:

	No. Of hours	Rate	Amount
Direct material
Building Permits			1500
Airline travel and motel			865
Total Direct Material			2365
Direct labor
Level 1	52	22	1144
Level 2	84	18	1512
Level 3	106	15	1590
Level 4	44	12	528
Total Direct Labor	286		4774
Overhead:	286	5	1430
(Total engineering hours x $5 per hour)
Total Cost			8569
Billing	(140% of Cost )		11997

b. Profit earned on job 295 = $4,302.

Working:

Actual cost :
Direct material                (A)			2365
Direct labor                       (B)			4774
Overheads :
Level 5 staff	20	8	160
Level 6 staff	66	6	396
Total Overheads              (C)			556
Total Actual cost (A+B+C)     (D)			7695
Billing done                                 (E)			11997
Profit earned                          (E-D)			4302