Question

Haworth Company is a management consulting firm. The company expects to incur \(167,500 of indirect costs this year. Indirect costs are allocated based on the following activities:

Activity	Estimated cost	Allocation Base	Estimated quantity of allocation base	Predetermined Overhead allocation rate
Site visits	\) 45,000	Number of visits	900 visits	\( 50 per visit
Documentation Preparation	122,500	Number of pages	3,500 Pages	\) 35 per page
Total Indirect costs	\( 167,500

Haworth bills clients at 120% of the direct labor costs. The company has estimated direct labor costs at \)240 per hour. Last month, Haworth completed a consulting job for Client 76 and used the following resources:

Allocation Base Client 76

Direct labor hours 60

Visits 5

Pages 50

Determine the total cost of the consulting job and the operating income earned.

Short answer

Consulting job cost: $16,275

Operating Income: $1,005

Step-by-step solution

Calculation of consulting job cost for client 76

$$\begin{gathered} \mathbf{Direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{=}\mathbf{}\mathbf{direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{hour}\mathbf{}\mathbf{\times }\mathbf{}\mathbf{no}\mathbf{.}\mathbf{of}\mathbf{}\mathbf{direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{hour} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{240}\mathbf{\times }\mathbf{60} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{400} \end{gathered}$$

$$\begin{gathered} \mathbf{visit}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{=}\mathbf{predetermined}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{allocation}\mathbf{}\mathbf{rate}\mathbf{}\mathbf{\times }\mathbf{No}\mathbf{.}\mathbf{of}\mathbf{}\mathbf{visits} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{50}\mathbf{\times }\mathbf{5} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{125} \end{gathered}$$

$$\begin{gathered} \mathbf{document}\mathbf{}\mathbf{preparation}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{=}\mathbf{predetermined}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{allocation}\mathbf{}\mathbf{rate}\mathbf{}\mathbf{\times }\mathbf{No}\mathbf{.}\mathbf{of}\mathbf{}\mathit{p}\mathit{a}\mathit{g}\mathit{e}\mathit{s} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{35}\mathbf{\times }\mathbf{50} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{750} \end{gathered}$$

$$\begin{gathered} \mathbf{total}\mathbf{}\mathbf{consulting}\mathbf{}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{=}\mathbf{direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{+}\mathbf{site}\mathbf{}\mathbf{visit}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{+}\mathbf{}\mathbf{documentation}\mathbf{}\mathbf{cost} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{400}\mathbf{+}\mathbf{\$}\mathbf{125}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{750} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{275} \end{gathered}$$

Calculation of operating Income

$$\begin{gathered} \mathbf{service}\mathbf{}\mathbf{revenue}\mathbf{}\mathbf{=}\mathbf{}\mathbf{total}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{\times }\mathbf{}\mathbf{determined}\mathbf{}\mathbf{percent} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{400}\mathbf{\times }\frac{\mathbf{120}}{\mathbf{100}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{280} \end{gathered}$$

role="math" localid="1651123999919" $$\begin{gathered} \mathbf{operating}\mathbf{}\mathbf{income}\mathbf{}\mathbf{=}\mathbf{}\mathbf{service}\mathbf{}\mathbf{revenue}\mathbf{}\mathbf{-}\mathbf{}\mathbf{consulting}\mathbf{}\mathbf{cost} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{280}\mathbf{-}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{275} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{005} \end{gathered}$$