Peter Realtors, a real estate consulting firm, specializes in advising companies on potential new plant sites. The company uses a job order costing system with a predetermined overhead allocation rate, computed as a percentage of direct labor costs. At the beginning of 2016, managing partner Andrew Peters Prepared the following budget for the year:

Chance Manufacturing, Inc. is inviting several consultants to bid for work. Andrew Peters wants to submit a bid. He estimates that this job will require about 250 direct labor hours.

Direct labor hours (professionals) 25,000hours
Direct labor costs (professionals) $2,500,000
Office rent 320,000
Support staff salaries 1,260,000
Utilities 420,000

Requirements:

1.Compute Peters Realtors’ (a) hourly direct labor cost rate and (b) predetermined overhead allocation rate.
2.Compute the predicted cost of the Chance Manufacturing job.
3.If Peters wants to earn a profit that equals 50% of the job’s cost, how much should he bit for the Chance Manufacturing job?

Explanation:

Answer to Part 1 – a)

Direct Labor Cost rate

Direct Labor Cost rate = Direct Labor cost / Direct Labor hours

Direct Labor Cost rate = 2,500,000 / 25,000

Direct Labor Cost rate = $ 100 per hour

Answer to Part 1 – b)

Indirect Cost allocation rate:

INDIRECT COST

Office Rent          320,000

Support staff salaries          1,260,000

Utilities           420,000

Total Indirect Costs           2 ,000,000

Predetermined indirect cost allocation rate

= Total Estimated indirect cost / Total estimated direct labor cost

Predetermined indirect cost allocation rate = 2,000,000 / 2,500,000

Predetermined indirect cost allocation rate = 80% of Direct Cost

Answer to Part 2)

Direct Labor (250 * 100)             25,000

Indirect Cost (25,000 * 80%)       20,000

Total Predicted cost              45,000

Answer to Part 3)

Predicted cost                    45,000

Desired Profit (50% of Predicted Cost)                 22,500

Required Service revenue                   67,500

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