Question

Blue Computer Repair treats each repair order as a job. Overhead is allocated based on the cost of technician time. At the start of the year, annual technician wages were estimated to be $800,000, and company overhead was estimated to be $500,000.

Required

a. Discuss why use of a predetermined overhead rate would be preferred to assigning actual overhead to repair jobs.

b. Suppose a job required parts costing $200 and technician time costing $100. What would be the total cost of the job?

Answer 1

a. The overhead cannot be identified and allocated to each job, therefore, it is considered as indirect cost which does not incur with the increase in number of jobs. In other words, all the indirect costs like overhead does not have direct relationship with the actual job.They arise irrespective of the existence of any job. For example, electricity cost will incur whether you have job or not. so you see this type of cost cannot be easily traceable to actual job. Consequently, it is appropriate to use predetermined overhead rate to easily allocate overhead to all the jobs.

b. Parts cost $200

Technician cost $100

Overhead cost $62.5 [$100*0.625(W1)]

Total cost $362.5

(W1) Predetermined overhead rate (based on technician cost)

= $500,000/$800,000

=0.625