Question

Question: Using job order costing in a service company

Assume that Roth’s accountants are expected to work a total of 8,000 direct labor hours in 2018. Roth’s estimated total indirect costs are $96,000 and the allocation base used is direct labor hours.

Requirements

1. What is Roth’s predetermined overhead allocation rate?

Short answer

Answer:

The predetermined overhead allocation rate of the company is $12.

Step-by-step solution

Service company

Service companies means the companies which are engaged in providing service activities to their clients. Professional services, legal services, etc. are considered as the service activities.

Predetermined overhead allocation rate

$$\begin{gathered} \mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}=\frac{\mathrm{Estimated}\mathrm{total}\mathrm{indirect}\mathrm{cost}}{\mathrm{Direct}\mathrm{labor}\mathrm{hours}} \\ =\frac{\$96,000}{8,000} \\ =\$12 \end{gathered}$$