Question

James CPA is a consulting firm. The firm uses a job order cost system in which each client represents an individual job. James traces direct labor and travel costs to each job (client). It assigns indirect costs to clients at a predetermined overhead rate based on direct labor hours.

At the beginning of the year, the managing partner prepared the following budget:
Direct labor hours (professional) 5,400 hours
Direct labor costs (professional) $ 540,000
Indirect costs: Support staff salaries $ 73,600
Office rent 59,000
Office supplies 24,000
Total expected indirect costs $ 156,600
Later that same year, in March, James served several clients. Records for two clients appear below: Oliverio McComb Direct labor cost (professional) $ 4,400 $ 3,400 Travel costs 600 200 Direct labor hours 44 hours 34 hours
Required:
Compute Jame’s predetermined overhead rate for the current year. Compute the total cost of serving the clients listed. Assume that James charges clients $210 per hour for his services. How much gross profit would he earn on each of the clients above, ignoring any difference between actual and applied overhead?

Answer 1

1. Predetermined overhead rate = Total estimated overhead cost ÷ Estimates direct labor hour

= $156,600 / 5,400

= $29 per direct labor hour

2. Applied overhead cost = Direct labor hours × Overhead rate per direct labor hour

Oliverio Applied overhead cost = 44 * 29 = $1276

McComb Applied overhead cost = 34 * 29 = $986

Cost Of Serving The Clients

Oliverio McComb

Direct labor cost $4400 $3400

Travel costs $600 $200

Applied overhead cost $1276 $986

Total cost $6276 $4586

3. Revenue = Direct labor hours*Charges per labor hour

Oliverio Revenue = 44*$210 = $9240

McComb Revenue = 34*$210 = $7140

Calculation Of Gross Profit

Oliverio McComb

Revenue $9240 $7140

Less: Total Costs $6276 $4586

Gross Profit $2964 $2554