Question

Exercise 2-6 Job-Order Costing for a Service Company [LO2-1, LO2-2, LO2-3]

Tech Solutions is a consulting firm that uses a job-order costing system. Its direct materials consist of hardware and software that it purchases and installs on behalf of its clients. The firm’s direct labor includes salaries of consultants that work at the client’s job site, and its overhead consists of costs such as depreciation, utilities, and insurance related to the office headquarters as well as the office supplies that are consumed serving clients.

Tech Solutions computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 92,500 direct labor-hours would be required for the period’s estimated level of client service. The company also estimated $1,156,250 of fixed overhead cost for the coming period and variable overhead of $0.50 per direct labor-hour. The firm’s actual overhead cost for the year was $1,177,550 and its actual total direct labor was 97,750 hours.

Required:

1. Compute the predetermined overhead rate.

2. During the year, Tech Solutions started and completed the Xavier Company engagement. The following information was available with respect to this job:

Direct materials	$	39,000
Direct labor cost	$	30,600
Direct labor hours worked		370

Compute the total job cost for the Xavier Company engagement.

Required 1

Required 2

Compute the predetermined overhead rate. (Round your answer to 2 decimal places.)

	Predetermined overhead rate per DLH

Compute the total job cost for the Xavier Company engagement. (Round your intermediate calculations to 2 decimal places.)

	Direct materials Direct labor Overhead applied Total manufacturing cost

Answer 1

Solution:

Part 1 --- Calculation of Predetermined Overhead Rate

Predetermined Overhead Rate

- The manufacturing costs which cannot be directly traceable with the production department or product are called manufacturing overheads or indirect manufacturing costs.

- Manufacturing Overheads are the indirect costs incurred in production department during making the product. It includes all indirect costs related to the factory which are related to the production.

- Overheads are the indirect manufacturing costs incurred on the making of product. These costs are not directly traceable with the production volume because it incurred for a period or in lump sum amount.

- Generally, the overhead costs are applied to the production department on predetermined basis since these costs are not directly traceable with the production.

- Predetermined Overhead Rate is the rate which is used to apply manufacturing overhead to products or job orders.

- Normally, it is calculated at the beginning of the period.

- It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).

- Allocation bases may be direct labor hours, direct labor costs, machine hours etc..

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base i.e. Direct Labor Hours

Predetermined Overhead Rate = Fixed Overhead Rate per DLH + Variable Overhead Rate per DLH

Fixed Overhead Rate per DLH = Estimated Manufacturing Fixed Overhead Cost $$1,156,250 / Estimated Direct Labor Hours 92,500 = $12.50 per direct labor hour

Hence,

Predetermined Overhead Rate per DLH = Fixed Overhead Rate per DLH $12.50 + Variable Overhead Rate per DLH $0.50

= $13 per DLH

Predetermined Overhead Rate = $13 per DLH

Part 2 – Calculation of Total Job Cost

	$$
Direct materials	$39,000
Direct labor cost	$30,600
Overhead Applied (Actual Total Direct Labor Hours 370 * Predetermined Overhead Rate $13)	$4,810
Total Manufacturing Cost	$74,410

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