Reference no: EM132639858
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.
|
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:
Question 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).
Question 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).
c. 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?