Tutorial_3_Solution (1) - 5.35 Job Costing, Service Sector...

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5.35 Job Costing, Service Sector - Hawk and Eagle Co. A. Last year’s costs: Direct professional labour $15,000,000 Overhead costs (all other costs) 21,000,000 Total costs $36,000,000 Overhead rate ($21,000,000/$15,000,000) 140% of direct professional labour cost B. Last year’s costs: Direct costs: Direct professional labour $15,000,000 Other direct costs 11,000,000 Total direct costs 26,000,000 Overhead costs (remaining costs) 10,000,000 Total costs $36,000,000 Overhead rate ($10,000,000/$15,000,000) 67% of direct professional labour cost C. Last year’s costs: Direct costs: Direct professional labour $15,000,000 Other direct costs 11,000,000 Total direct costs 26,000,000 Overhead costs (remaining costs) 10,000,000 Total costs $36,000,000 Overhead rate ($10,000,000/$26,000,000) 38.5% of total direct costs D. Calculation of overhead allocated under three methods: Case 875 Case 876 Method 1: Direct professional labour * 140% $20,000 * 140% $28,000 $28,000 Method 2: Direct professional labour * 67% $20,000 * 67% $13,400 $13,400 Method 3: Total direct costs * 38.5% Case 875: $29,000 * 38.5% $11,165 Case 876: $37,000 * 38.5% $14,245
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Total costs under alternative allocation methods: Method 1 Method 2 Method 3 Case # 875: Direct costs $20,000 $29,000 $29,000 Allocated overhead 28,000 13,400 11,165 Total job costs 48,000 42,400 40,165 Case # 876: Direct costs 20,000 37,000 37,000 Allocated overhead 28,000 13,400 14,245 Total job costs 48,000 50,400 51,245 Total costs assigned $96,000 $92,800 $91,410 E. The allocation base is different for all three methods. In Method 1, only direct professional labour costs are used as allocation base and no direct costs were traced to jobs, so $21 million had to be allocated. This method has the highest overhead rate (140% of direct professional labour cost). None of the specific costs are traced to jobs. Therefore, the use of actual resources is not reflected other than the use of direct professional labour. In Method 2, $11 million in cost was traced directly to jobs, so only $10 million had to be allocated. Direct professional labour is the allocation base, but because the amount of common costs is less than half, the allocation rate is less than half (67% of direct
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This note was uploaded on 10/09/2011 for the course MANAGEMENT MGTB03H3 taught by Professor Liangchen during the Summer '09 term at University of Toronto- Toronto.

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Tutorial_3_Solution (1) - 5.35 Job Costing, Service Sector...

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