Question

Che Platinum Web Services designs and maintains websites for small business entrepreneurs. Competition has been intensifying in recent years and the company has been losing business to larger web design firms. Summary data concerning the last two years of operations follow: Estimated hours of service demanded Estimated overhead cost Actual hours of service provided Actual overhead cost incurred Hours of service available at capacity Last Year 1,700 $ 125,000 1,600 $ 125,000 2,500 This Year 1,450 $ 125,000 1,350 $ 125,000 2,500 The company applies its overhead costs to jobs using the hours of service provided as the allocation base. For example, this year and last year, 50 service-hours were required to maintain the website for a small company called Verde Consulting. All of Platinum's overhead costs are fixed, and the actual overhead cost incurred was exactly as estimated at the beginning of the year in last year and this year. Required: 1. Platinum Web Services computes its predetermined overhead rate at the beginning of each year based on the estimated overhead cost and the estimated hours of service demanded for the year. Using this approach, how much overhead would have been applied to the Verde Consulting job last year? How about this year? 2. The president of Platinum Web Services has heard that some companies in the industry have changed to a system of computing the predetermined overhead rate based on the hours of service available at capacity. He would like to know what effect this method would have on job costs. How much overhead cost would have been applied to the Verde Consulting job last year using this method? How much would have been applied this year? 3. If Platinum computes its predetermined overhead rate based on the hours of service available at capacity as in (2) above, how much < Prev 5 of 5

Answer 1

1)

Predetermine overhead rate per hour of services demanded = Estimated overhead cost / Estimated hours of services demanded

	Last Year	This Year
Estimated overhead cost	$125,000	$125,000
÷
Estimated hours of services demanded	1700	1450
Pre-determine overhead rate per hour of services demanded	$73.52	$86.20

	Last Year	This Year
Pre-determine overhead rate per hour of services demanded	$73.52	$86.20
×
Actual hours of services demanded by verde consulting job	50	50
Overhead cost allocated to verde consulting job	$3,676.00	$4,310.00

____________________________________________________

2.

	Last Year	This Year
Estimated overhead cost	$125,000	$125,000
÷
Estimated hours of services available at capacity	2500	2500
Pre-determine overhead rate per hour of services available at capacity	$50.00	$50.00

	Last Year	This Year
Pre-determine overhead rate per hour of services available at capacity	$50.00	$50
×
Actual hours of services demanded by verde consulting job	50	50
Overhead cost allocated to verde consulting job	$2,500.00	$2,500.00

_____________________________________________________

3.

	Last Year	This Year
Estimated hours of services available at capacity	2500	2500
Less: Actual hours of services provided during the year	-1600	-1350
Hours of services at unused capacity	900	1150
×
Pre-determine overhead rate per hour of services available at capacity	$50	$50
Unused capacity cost incurred by the firm	$45,000	$57,500