Question

Please only answer question E. Thank you!

8. Hodges and Associates is a small firm that provides structural engineering services for its clients. The company performs structural engineering services for both residential and commercial buildings. Last year, total overhead costs of $330,000 were allocated based on direct labor costs. A total of $300,000 in direct labor costs were incurred in the following areas: $120,000 in the residential segment and $180,000 in the commercial segment. Direct materials used were negligible and are included in overhead costs. Sales revenue totaled $450,000 for residential services and $330,000 for commercial services. The management of Hodges and Associates would like to use activity-based costing to allocate overhead rather than a plantwide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs. Estimated Cost Driver Activity Estimated Overhead Costs Residential Commercial Activity Cost Driver Total 4,500 8,000 Scheduling and data entry Direct labor hours Computer maintenance Number of computer hours Processing permit applications Number of applications Total 8,000 20,000 $100,000 70,000 160,000 $ 330,000 3,500 12,000 400 400 800 a. Using the plantwide allocation method, calculate the total cost and the profit for each product. (Hint: Don't forget to include all types of product costs in your total cost calculation, similar to #4a above. Product costs for this service company include direct labor and overhead.) b. Using activity-based costing, calculate the predetermined overhead rate for each activity. (Hint: Step 1 through step 3 in the activity-based costing process have already been done for you; this is step 4.) Round results to the nearest cent. c. Using activity-based costing, calculate the amount of overhead assigned to each product. (Hint: This is step 5 in the activity-based costing process.) d. Using activity-based costing, calculate the total cost and the profit for each product. (see the hint from part a) e. What caused the shift of overhead costs to the residential product using activity-based costing? How might management use this information to make improvements within the company?

Answer 1

e. The shift of overheads to residential product using activity based costing has been caused due to higher consumption of activities Scheduling and data entry is higher for residential compared to commercial Processing permit application is equal consumption with commercial In case of direct labor cost the overheads was allocated at 40% ($120,000/$300,000) to residential product When activities are consumed in more than this proportion the overheads allocated to residential will increase The Activity based costing method is useful to management in below ways i) It helps in accurate product costing since the overheads allocation as per ABC method is reliable ii) It helps in product pricing since cost allocation is accurate and reliable iii) It helps in achieving the profitablity target iv) It helps in cost management through cost control and cost reduction v) It helps in elimination of non-value adding activities and thereby improve the process