322 B M A J O C 1289

Raven Design is a website design and consulting firm. The firm uses a job cost system, in which each client is a different job. Raven Design traces direct labor, licensing costs, and travel costs directly to each job (client). It allocates indirect costs to jobs based on a pre-determined indirect cost allocation rate computed as a percentage of direct labor costs. At the beginning of the current year, managing partner Jill Herbert prepared the following budget:
Direct labor hours (professional)................................................. 8,000 hours
Direct labor costs (professional).................................................. $ 1,600,000
Support staff salaries................................................................... $ 190,000
Computer leases......................................................................... $ 41,000
Office supplies............................................................................. $ 23,000
Office rent................................................................................... $ 66,000
Later that same year in November, Raven Design served several clients. Records for two clients appear here:

.:.

Requirements
1. Compute Raven Design’s predetermined indirect cost allocation rate for the current year.
2. Compute the total cost of each of the two jobs listed.
3. If Raven Design wants to earn profits equal to 20% of sales revenue, how much (what total fee) should the company charge each of these two clients?
4. Why does Raven Design assign costs to jobs?

SOLUTION:

Req. 1
Predetermined indirect cost allocation rate:

Estimated indirect costs:

Support staff salaries................……….
$ 190,000 Computer leases…………………….…...
41,000
Office supplies.......................…………..
23,000
Office rent..........................................…. 66,000
Total estimated indirect costs........………
$ 320,000

Estimated indirect costs
=
$ 320,000
=
20%
Estimated direct labor cost

$1,600,000

Req. 2