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.

Answer 1

1.

Estimated direct labor hours = 97,500

Estimated fixed overhead = $1,316,250

Estimated variable overhead per direct labor hour = $0.50

predetermined overhead rate =Estimated variable overhead per direct labor hour + Estimated fixed overhead/ Estimated hours

= 0.50+ 1,316,250/97,500

= $14 per direct labor hour

2.

Direct labor hours used in Xavier company engagement = 390

Overhead applied to Xavier company engagement = Direct labor hours used in Xavier company engagement x predetermined overhead rate

= 390 x 14

= $5,460

Total Job Cost
Direct materials	$	41,700
Direct labor cost	$	28,800
Overhead applied	$	5,460
Total Job Cost	$	75,960

The total job cost for the Xavier Company engagement $75,960

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