Question

Tech Solutions is a consulting firm that uses a job-order costing system. Its direct materials consist of hardware and software that it purchases and installs on behalf of its clients. The firm’s direct labor includes salaries of consultants that work at the client’s job site, and its overhead consists of costs such as depreciation, utilities, and insurance related to the office headquarters as well as the office supplies that are consumed serving clients. Tech Solutions computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 97,500 direct labor-hours would be required for the period’s estimated level of client service. The company also estimated $1,316,250 of fixed overhead cost for the coming period and variable overhead of $0.50 per direct labor-hour. The firm’s actual overhead cost for the year was $1,337,350 and its actual total direct labor was 101,100 hours.

Required:

1. Compute the predetermined overhead rate.

2. During the year, Tech Solutions started and completed the Xavier Company engagement. The following information was available with respect to this job:

Direct materials	$	41,700
Direct labor cost	$	28,800
Direct labor hours worked		390

Compute the total job cost for the Xavier Company engagement.

	Predetermined overhead rate per DLH

	Direct materials Direct labor Overhead applied Total manufacturing cost

Answer 1

Solution

(1) For calculating Predetermined Overhead Rate per Direct Labor Hours, we have to use the following formula,

Predetermined Overhead Rate ($) = Estimated Total Manufacturing Cost / Estimated Direct Labor Hours

Where, Estimated Total Manufacturing Costs ($) = Estimated Fixed Manufacturing Costs + Estimated Variable Costs

Here we have,

Estimated Fixed Manufacturing Costs = $ 1,316,250

Estimated Variable Costs = Variable overhead per labor hour X Estimated Direct Labor Hour
Or, $ 0.50 X 97,500
Or, $ 48,750

Therefore, Estimated Total Manufacturing Costs ($) = $ (1,316,250 + 48,750)
Or, $ 1,365,000

and, Estimated Direct Labor Hours = 97,500

Therefore, Predetermined Overhead Rate ($) = 1,365,000 / 97,500
Or, 14.00

Answer: Predetermined Overhead Rate = $ 14 per Direct Labor Hour (DLH)

(2) In the given problem, solution will be worked out as follows,

Predetermined Overhead Rate (per DLH)	$ 14
Direct Materials	$ 41,700
Direct Labor	$ 28,800
Overhead Applied (390 Direct Labor Hours X $ 14 per DLH)	$ 5,460
TOTAL MANUFACTURING COST	$ 75,960