Question

Activity	Driver	Driver Frequency	Cost of Activity
Direct Labor	Direct Labor Hours	50,000	$ 1,250,000.00
Vacuuming	Machine Hours	2,000	$       62,000.00
Set-up	Job	5,000	$     200,000.00
Testing	Tests made	5,000	$       60,000.00
Customer service	Orders taken	1,200	$       30,000.00
Invoicing	Invoices mailed	2,400	$       48,000.00
Total			$ 1,650,000.00
Activity	Pool Opening	Pump Repair	Pool Cleaning
Materials	350	1000	50
Direct Labor Hours	15	40	2
Vacuuming	3	0	2
Set-up	1	1	1
Testing	3	0	2
Orders taken	1	1	1
Invoices	2	2	1
Add 35% profit onto every job.
a.       Calculate the current overhead rate per direct labor hour
b.       Calculate the cost of each of the jobs using direct labor hour as the rate
c.       Calculate the price charged for the job
d.       Calculate the ABC charging rates.
e.       Recalculate the costs for each job using these new rates.
f.        Once again calculate the price Tom would charge for each of these jobs.
g.       What does a comparison of the results suggest? Be specific.

Answer 1

Answer:
Requirement a	Calculate the current overhead rate per direct labor hour
	Current overhead rate per direct labor hour	=Total overhead cost/Total direct labor hours
		=$1650,000/50,000
		$                           33.00
Requirement b	The cost of each of the jobs using direct labor hour as the rate would be as follows:
	Particulars	Pool Opening		Pump Repair		Pool Cleaning
	Direct material	$                              350		$                      1,000		$                  50
	Direct Labor	$                              375	($25*15)	$                      1,000	($25*40)	$                  50	($25*2)
	Overhead cost	$                              495	($33*15)	$                      1,320	($33*40)	$                  66	($33*2)
	Total cost	$                           1,220		$                      3,320		$                166
	Add: Mark-up 35%	427	(1220*35%)	1162	(3320*35%)	58.1	(166*35%)
Requirement c	The price of each product would be as follows:
	Particulars	Pool Opening		Pump Repair		Pool Cleaning
	Total cost	$                           1,220		$                      3,320		$                166
	Add: Mark-up 35%	427	(1220*35%)	1162	(3320*35%)	58.1	(166*35%)
	Selling Price	$                           1,647	($1220+427)	$                      4,482	(3320+1162)	$                224	(166+58.1)
Requirement d	The ABC charging rates would be as follows:
	Activity	Driver	Driver Frequency	Cost of Activity	Cost per activity
	Direct Labor	Direct Labor Hours	50,000	$ 1,250,000.00	$                       25	($1250000/50000)
	Vacuuming	Machine Hours	2,000	$       62,000.00	$                       31	($62000/2000)
	Set-up	Job	5,000	$     200,000.00	$                       40	($200000/5000)
	Testing	Tests made	5,000	$       60,000.00	$                       12	($60000/5000)
	Customer service	Orders taken	1,200	$       30,000.00	$                       25	($30000/1200)
	Invoicing	Invoices mailed	2,400	$       48,000.00	$                       20	($48000/2400)
	Total			$ 1,650,000.00