Question

ProWorks is a website design and consulting firm based in Michigan. The firm uses a job cost system in which each client is a different job. Proworks traces direct labor, software licensing costs, and travel costs directly to each job (client). It divides overhead into two cost pools, "Indirect Labor" and "Office Overhead." It allocates Indirect Labor (support staff salaries) to jobs based on software licensing costs. It allocates Office Overhead (all other overheads) to jobs based on direct labor hours. At the beginning of 2016, managing partner Mark Milici prepared the following estimates:

Direct labor hours $14,000 hours

Direct labor costs $1,400,000

Software licensing costs $50,000

Travel costs $80,000

Support staff salaries $200,000

Computer leases $50,000

Office supplies $30,000

Office rent $60,000

In January, 2016, ProWorks served three clients. Records for the clients appear here:

Dining Corp Hut Shuttle Lucidyne

Direct Labor Hours: 600 hours 50 hours 300 hours

Software licensing costs: $5,000 $500 $2,000

Travel costs: $9,000 $2,000 $0

1) Construct a cost report for managers showing how all costs are allocated to each of the three jobs (clients) listed.

Answer 1

A cost report for managers showing how all costs are allocated to each of the three jobs (clients)
	Job 1	Job 2	Job 3
Direct Labour cost	$60,000	$5,000	$30,000
Software licensing costs	$5,000	$500	$2,000
Travel Cost	$9,000	$2,000	$0
Indirect Labour (Support staff salaries)	$20,000	$2,000	$8,000
Office overheads	$6,000	$500	$3,000
Total Cost	$100,000	$10,000	$43,000
Direct Labour cost per hour = $1400000/14000 hours = $100 per hour
Support Staff salaries per dollar of software licensing cost = $200000 / $50000 = $4 per dollar of software licensing cost
Office overhead cost per direct labour hour = Office overheads / direct labour hours = [$50000+$30000+$60000]/14000 hours = $10 per direct labour hour