Concept explainers
1. a.
Compare the bid price for the job L and job E under simplified costing system.
1. a.
Explanation of Solution
Budgeted overhead allocation rate: The budgeted overhead allocation rate is the rate at which the overhead is allocated. This is calculated by dividing the total fixed and variable overheads cost by the base of the allocation.
Compare the bid price for the job L and job E under simplified costing system.
Job L | Job E | |
Professional labor cost: | ||
70 hours at $65 (1) | $4,550 | |
70 hours at $65 | $4,550 | |
Professional support: | ||
70 hours at $70 (2) | 4,900 | |
70 hours at $70 | 4,900 | |
Total cost | $9,450 | $9,450 |
Markup on cost, 25% | 2,363 | 2,363 |
Bid price | $11,813 | $11,813 |
Working Note (1):
Compute the cost of professional labor per hour.
Working Note (2):
Computed the cost of professional support per hour.
b.
Discuss whether the results seem reasonable.
b.
Explanation of Solution
The administrative support costs are driven by the Job L, and also Job L had many more expensive partner hours. Yet the two jobs’ total costs are identical. Hence, no, the results do not seem reasonable.
2.
Compare the bid price for the job L and job E under activity-based costing system.
2.
Explanation of Solution
Compare the bid price for the job L and job E under activity-based costing system.
Job L | Job E | |
Partner labor cost: | ||
50 hours at $125 (3) | $6,250 | |
15 hours at $125 | $1,875 | |
Associate labor cost: | ||
20 hours at $50 (4) | 1,000 | |
55 hours at $50 | 2,750 | |
Legal support: | ||
70 hours at $50 (5) | 3,500 | |
70 hours at $50 | 3,500 | |
Administrative support: | ||
50 hours at $100 (6) | 5,000 | |
15 hours at $100 | 1,500 | |
Total cost | $15,750 | $9,625 |
Markup on cost, 25% | 3,938 | 2,406 |
Bid price | $19,688 | $12,031 |
Working Note (3):
Compute the cost of partner labor per hour.
Working Note (4):
Computed the cost of associate labor per hour.
Working Note (5):
Computed the cost of legal support per professional hour.
Working Note (6):
Computed the cost of staff support per partner hour.
3. a.
Compute the difference in bid price for each job between simplified costing system and activity-based costing system.
3. a.
Explanation of Solution
Calculate the difference between the bid price under simplified costing system and activity-based costing system.
Job L | Job E | |
Simplified costing | $11,813 | $11,813 |
ABC costing | 19,688 | 12,031 |
Difference | $(7,875) | $(218) |
b.
Identify whether the jobs were undercosted or overcosted, and also identify the job that had the greater differential with the reason behind it.
b.
Explanation of Solution
Using the simplified costing system, each of the two jobs was undercosted. Job E was undercosted by an insignificant amount of $218, whereas, the Job L was undercosted by a very significant amount of $7,875, as the litigation work was entailed by Job L, which had to be done primarily by partners. Without regard to whether associates’ hourly labor cost of $50 or partner hourly labor cost of $125 was being worked on a job, like peanut butter, the costs are equally spread by the simplified system over both jobs. Also, when compared to associates, more administrative support is more consumed by the partners.
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Chapter 9 Solutions
Principles of Cost Accounting
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