Question

Skylark Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client is a different job. Skylark Design assigns direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Judi Jacquin prepared the following

budget estimates:

Direct labor hours (Professionals)	8,000 hours
Direct labor costs (Professionals)	\(2,000,000
Support staff salaries	866,000
Computer leases	49,000
Office supplies	24,000
Office rent	61,000

In November 2018, Skylark Design served several clients. Records for two clients

appear here:

	Tasty Co-op	Maynard chocolates
Direct labor hours	800 hours	300 hours
Software licensing costs	\)1,500	$500
Travel costs	11,000	0

Requirements

1. Compute Skylark Design’s direct labor rate and its predetermined overhead

allocation rate for 2018.

2. Compute the total cost of each job.

3. If Judi wants to earn profits equal to 50% of service revenue, what fee should she charge each of these two clients?

4. Why does Skylark Design assign costs to jobs?

Short answer

1. Thedirect labor rate of the companyis $250 per hour, and thepredetermined overhead allocation rateis 50%.

2. The total cost of the tasty co-op is $312,500, and of the Maynard chocolates, $113,000.

3. If Judi wants to earn a profit equal to 50% of service revenue, she should charge $625,000 from tasty co-op and $226,000 from Maynard chocolates.

4. The cost is assigned to the job for deciding theselling priceof the job because the selling price is computed by adding thetotal cost of manufacturingand the expected profit margin. Hence, Skylark design assigns costs to jobs to identify the job’s price.

Step-by-step solution

 Meaning of Costing System

Costing system is used to calculate the total cost of manufacturing the product. It can be done either by using the process or the job order costing system. It helps in managing the cost of business operations and is therefore useful in making good decisions for the business.

Direct labor rate

$$\begin{gathered} \mathbf{\text{Directlaborrate}}\mathbf{=}\frac{\mathbf{\text{BudgetedDirectlaborcost}}}{\mathbf{\text{Budgeteddirectlabourhour}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{8000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{250} \end{gathered}$$

Total estimated overhead costs

Total estimate overhead cost = Support staff + Computer leaes + office supplies + office rent

= $866,000 + $49,000 + $24,000 + $61,000

= $1,000,000

The predetermined overhead allocation rate for 2018

$$\begin{gathered} \mathbf{\text{Predeterminedallocationrate}}\mathbf{=}\mathbf{}\frac{\mathbf{\text{Totalestimateoverheadcosts}}}{\mathbf{\text{BudgeteddirectLaborcosts}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{50}\mathbf{\%} \end{gathered}$$

Total cost of tasty co-op and Maynard chocolates

Particulars	Tasty co-op	Maynard Chocolates
Direct labor cost	$200,000 (800 hr x $250)	$75,000 (300 hr x $250)
Software licensing cost	1,500	500
Travel cost	11,000	0
Manufacturing overhead (50% of direct labor cost)	100,000	37,500
Total cost	312,500	113,000

Fess to be charged to Tasty Co-op to earn 50% of the revenue

Revenue = Total cost + Expected profit

A = $312,500 + 50%of A

A = $625,000

Fess to be charged to Maynard chocolates to earn 50% of the revenue

Revenue = Total cost + Expected profit

A = $113,000 + 50%of A

A = $226,000