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 60,000 direct labor-hours would be required for the period’s estimated level of client service. The company also estimated $390,000 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 $409,300 and its actual total direct labor was 67,450 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	$	48,450
Direct labor cost	$	25,700
Direct labor hours worked		240

1. Compute the predetermined overhead rate.

2.

Direct materials	?
Direct labor	?
Overhead applied	?
Total manufacturing cost	$0

Answer 1

1.

Predetermined overhead rate = Variable overhead cost per direct labor-hour + Fixed overhead cost/Estimated direct labor hours

= 0.50 + 390,000/60,000

= 0.50 + 6.50

= $7 per direct labor hour

2.

Calculation of total cost of Xavier Company engagement job

Overhead applied = Actual direct labor hours used x  Predetermined overhead rate

= 240 x 7

= $1,680

Job cost sheet

Direct material	48,450
Direct labor	25,700
Overhead applied	1,680
Total manufacturing cost	$75,830