Question

Tech Solutions is a consulting firm that uses a job-order costing system. Its direct materials consist of hardware and software that it purchases and installs on behalf of its clients. The firm’s direct labor includes salaries of consultants that work at the client’s job site, and its overhead consists of costs such as depreciation, utilities, and insurance related to the office headquarters as well as the office supplies that are consumed serving clients.

Tech Solutions computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 65,000 direct labor-hours would be required for the period’s estimated level of client service. The company also estimated $487,500 of fixed overhead cost for the coming period and variable overhead of $0.50 per direct labor-hour. The firm’s actual overhead cost for the year was $505,700 and its actual total direct labor was 70,900 hours.

Required:

1. Compute the predetermined overhead rate.

2. During the year, Tech Solutions started and completed the Xavier Company engagement. The following information was available with respect to this job:

Direct materials	$	49,200
Direct labor cost	$	24,900
Direct labor-hours worked		260

Compute the total job cost for the Xavier Company engagement.

Answer 1

1.

Estimated direct labor hours = 65,000

Estimated fixed manufacturing overhead = $487,500

Estimated variable manufacturing overhead per hour = $0.50

Predetermined overhead rate = Estimated variable manufacturing overhead per hour + Estimated fixed manufacturing overhead/ Estimated direct labor hours

= 0.50 + 487,500/65,000

= 0.50+7.5

= $8 per direct labor hour

2.

Direct labor hours used on Xavier Company engagement = 260

Overhead applied to Xavier Company engagement = Direct labor hours used on Xavier Company engagement x Predetermined overhead rate

= 260 x 8

= $2,080

Job Cost Sheet
Direct materials	$	49,200
Direct labor cost	$	24,900
Overhead applied	$	2,080
Total cost	$	76,180

  The total job cost for the Xavier Company engagement = $76,180