Question

Liberty Box Company calculated an indirect-cost rate of $12.50 per labor hour for fringe benefits for use in their normal costing system. At the end of the year, the actual cost of fringe benefits was $980,000. The total of labor hours worked for the year was the same amount as budgeted, 70,000 hours. If Job #640 required the use of 15 labor hours and the company used the adjusted allocation rate approach, by what amount would the cost of Job #640 change?

A. $560.00

B. $281.25

C. $22.50

D. $20.50

Answer 1

Using the adjusted allocation rate approach, the actual indirect-cost rate was found to be $1.50 higher than the budgeted rate. For Job #640 requiring 15 labor hours, the cost increase would be $22.50.

Step-by-step explanation:

The question asks about adjusting the cost of a job using an adjusted allocation rate approach after determining the actual cost of fringe benefits for the year. The indirect-cost rate originally calculated was $12.50 per labor hour. However, at the end of the year, the actual cost was $980,000 for 70,000 labor hours, leading to an actual indirect-cost rate of $14.00 per labor hour ($980,000 ÷ 70,000 hours). The difference between the budgeted indirect-cost rate and the actual rate is $1.50 ($14.00 - $12.50).

To find the change in cost for Job #640 using 15 labor hours:

1. Calculate the difference in rates: $14.00 (actual) - $12.50 (budgeted) = $1.50.
2. Multiply this difference by the labor hours used for Job #640: $1.50 × 15 hours = $22.50.

Therefore, the cost of Job #640 would increase by $22.50 using the adjusted allocation rate approach.