Reference no: EM132647629
Question - Hodges and Associates is a small firm that provides structural engineering services for its clients. The company performs structural engineering services for both residential and commercial buildings. Last year, total overhead costs of $330,000 were allocated based on direct labour costs. A total of $300,000 in direct labour costs were incurred in the following areas: $120,000 in the residential segment and $180,000 in the commercial segment. Direct materials used were negligible and are included in overhead costs. Sales revenue totalled $450,000 for residential services and $330,000 for commercial services.
The management of Hodges and Associates would like to use activity-based costing to allocate overhead rather than a plantwide rate based on direct labour costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs.
Estimated Cost Driver Activity
|
Activity
|
Cost Driver
|
Estimated Overhead Costs
|
Residential
|
Commercial
|
Total
|
|
Scheduling and data entry
|
Direct labour hours
|
$100,000
|
4,500
|
3,500
|
8,000
|
|
Computer maintenance
|
Number of computer hours
|
70,000
|
8,000
|
12,000
|
20,000
|
|
Processing permit applications
|
Number of applications
|
160,000
|
400
|
400
|
800
|
|
Total
|
|
$330,000
|
|
|
|
Required -
a. 1. Using the plantwide allocation method, calculate the total cost for each product.
2. Using the plantwide approach, calculate the profit for each product. Also calculate profit as a percent of sales revenue for each product (round to the nearest tenth of a percent).
b. 1. Using activity-based costing, calculate the predetermined overhead rate for each activity. (Round results to the nearest cent.)
2. Using activity-based costing, calculate the amount of overhead assigned to each product.
3. Using activity-based costing, calculate the profit for each product. Also calculate profit as a percent of sales revenue for each product (round to the nearest tenth of a percent).
What caused the shift of overhead costs to the residential product using activity-based costing? How might management use this information to make improvements within the company?