CHAPTER 4 JOB I G 4-21 (20 25 min.) Job costing, consulting firm. 1. Budgeted indirect-cost rate $13,000,000 $5,000,000 260% of professional labor costs INDIRECT POOL Consulting Support ALLOCATION BASE Labor Costs OBJECT: JOB FOR CONSULTING CLIENT Indirect Costs Direct Costs DIRECT S Labor 2. At the budgeted revenues of $20,000,000, Taylor s operating income of $2,000,000 equals 10% of revenues. Markup rate $20,000,000 $5,000,000 400% of direct professional labor costs 4-1
3. Budgeted costs Direct costs: Director, $200 3 $ 600 Partner, $100 16 1,600 Associate, $50 40 2,000 Assistant, $30 160 4,800 $ 9,000 Indirect costs: Consulting support, 260% $9,000 23,400 Total costs $32,400 As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is 400% of direct professional costs. Therefore, Taylor should bid 4 $9,000 $36,000 for the Red Rooster job. Bid price to earn target operating income-to-revenue margin of 10% can also be calculated as follows: Let R revenue to earn target income R 0.10R $32,400 0.90R $32,400 R $32,400 0.90 $36,000 or, Direct costs $ 9,000 Indirect costs 23,400 Profit (0.40 9,000) 3,600 Bid price $36,000 4-2
4-29 (20 30 min.)research project costs, variation in overhead rates. 1. Cost Category Departments ($000s) Liberal Arts atural Sciences Engineering Business Total Direct costs $1,200 $5,000 $5,500 $2,100 $13,800 Professors salaries 1,000 1,600 1,500 2,000 6,100 Graduate students stipends 700 1,500 2,500 500 5,200 Total direct labor costs $1,700 $3,100 $4,000 $2,500 $11,300 Overhead costs 850 8,030 9,600 5,250 23,730 Overhead rate (overhead costs total direct labor costs) 50% 259% 240% 210% 210% 2. Cost Category Departments ($000s) Liberal Arts atural Sciences Engineering Business Total Direct costs $1,200 $5,000 $5,500 $2,100 $13,800 Total direct labor costs 1,700 3,100 4,000 2,500 11,300 Budgeted overhead (210% of total direct labor costs) 3,570 6,510 8,400 5,250 23,730 Budgeted costs of research projects submitted to funding agencies $6,470 $14,610 $17,900 $9,850 $48,830 3. Cost Category Departments ($000s) Liberal Arts atural Sciences Engineering Business Total Direct costs $1,200 $ 5,000 $ 5,500 $2,100 $13,800 Total direct labor costs 1,700 3,100 4,000 2,500 11,300 Overhead costs 850 8,030 9,600 5,250 23,730 Budgeted costs of research projects $3,750 $16,130 $19,100 $9,850 $48,830 4. (All dollar figures in 000s). The liberal arts professors are required to submit proposals for research grants that incorporate overheads that are 210% of the direct labor cost. From requirements 2 and 3, they are, on average, bidding about 73% ($6,470 $3,750 1.73), more than their budgeted costs. In effect, they are sharing some of the overhead burden from natural sciences and engineering, but as a result, their proposals are uncompetitive in the researchfunding marketplace. The danger is that if the liberal arts professors do not get the funding they need because their bids are uncompetitive, then they may not be able to support their own graduate students and their use of university resources. 4-3
5. (All dollar figures in 000s). If the liberal arts professors charge their own overhead rate of 50%, then, they will charge $850 in overhead costs. The remaining overhead costs will be $22,880 ($23,730 $850). The remaining total direct labor costs will be $9,600 ($3,100 + $4,000 + $2,500). This will result in an average overhead rate of about 238% ($22,880 $9,600) for the other three departments. 6. If liberal arts is allowed to charge its own rate of 50%, it is unlikely that the business department would be happy to share the overhead burdens arising from the research in the natural sciences and in engineering. It would want to apply its own overhead rate of 210%. Then, engineering will want to apply its own relatively lower rate of 240% leaving the natural sciences having to apply their rate of 259%. This may make engineering and natural sciences, in particular, uncompetitive in the research-funding marketplace, and may, over time, weaken the university s prestige. 4-4
4-31 (15 20 min.) Service industry, job costing, law firm. 1. INDIRECT POOL Legal Support ALLOCATION Labor-Hours BASE OBJECT: JOB FOR CLIENT Indirect Costs Direct Costs DIRECT Labor 2. Budgeted professional Budgeted direct labor compensation per professional labor-hour direct cost rate Budgeted direct labor-hours per professional $104,000 1,600 hours $65 per professional labor-hour Note that the budgeted professional labor-hour direct-cost rate can also be calculated by dividing total budgeted professional labor costs of $2,600,000 ($104,000 per professional 25 professionals) by total budgeted professional labor-hours of 40,000 (1,600 hours per professional 25 professionals), $2,600,000 40,000 $65 per professional labor-hour. 3. Budgeted indirect cost rate Budgeted total costs in indirect cost pool Budgeted total professional labor-hours $2,200,000 1,600 hours 25 $2,200,000 40,000 hours $55 per professional labor-hour 4. Richardson Punch Direct costs: labor, $65 100; $65 150 Indirect costs: Legal support, $55 100; $55 150 $ 6,500 $ 9,750 5,500 $12,000 8,250 $18,000 4-5
4-34 (15 min.) ormal costing, overhead allocation, working backward. 1.a. Manufacturing overhead allocated 200% Direct manufacturing labor cost $3,600,000 2 Direct manufacturing labor cost Direct manufacturing labor cost $3,600,000 $1,800,000 2 b. Total manufacturing cost Direct material used + Direct manufacturing labor cost + Manufacturing overhead allocated $8,000,000 Direct material used + $1,800,000 + $3,600,000 Direct material used $2,600,000 2. Work in Process 1/1/2007 Cost of goods manufactured + + Total manufacturing cost Work in Process 1/1/2007 Denote Work in Process on 12/31/2007 by X $320,000 + $8,000,000 $7,920,000 + X X $400,000 4-6