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More On Overhead Application

JLR Enterprises provides consulting services and uses a job-order costing system. It incurs various direct costs that are traceable to clients as well as indirect overhead costs. JLR wants to bid on a project for Remco Inc. and must determine the bid amount by calculating direct costs, applying the overhead rate to indirect costs, and adding a markup percentage. The document provides budgeted costs and traceability percentages to help calculate the overhead rate and determine the bid for Remco.

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146 views

More On Overhead Application

JLR Enterprises provides consulting services and uses a job-order costing system. It incurs various direct costs that are traceable to clients as well as indirect overhead costs. JLR wants to bid on a project for Remco Inc. and must determine the bid amount by calculating direct costs, applying the overhead rate to indirect costs, and adding a markup percentage. The document provides budgeted costs and traceability percentages to help calculate the overhead rate and determine the bid for Remco.

Uploaded by

Yu-Han Kao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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More on Overhead

Application
Overhead Application in a Service Firm
Problem: JLR Enterprises

Refer to Session 1 Problem Set


JLR Enterprises
JLR Enterprises provides consulting services throughout California and uses job-order costing system to accumulate the cost of client
projects. In contrast, other costs incurred by JLR, but not identifiable with specific clients, are charged to jobs using a predetermined
overhead application rate. Clients are billed directly for chargeable costs, overhead, and a markup. JLR's director of cost management,
Brent Dean, anticipates the following costs for the upcoming year:

Percentage of cost directly


Cost
traceable to clients
Professional staff salaries
$2,500,000 80%
Administrative support
Staff 300,000 60%
Travel 250,000 90%
Photocopying 50,000 90%
Other operating costs 100,000 50%
Total $3,200,000

The firm desires to make a $640,000 profit for the firm, and adds a percentage markup on total cost to achieve that goal.
It uses budgeted direct costs as the basis for allocating indirect costs.
Bidding for Remco Inc.
• During the year, JLR wants to bid on a project for Remco Inc. The following
costs are estimated for this project: Professional staff salaries $41,000
Administrative support staff $2,600
Travel $4,500
Photocopying $500
Other operating costs $1,400
• What should be the bid?
Overhead Allocation in Billing
Budgeted cost % traceable to clients
Professional salaries $2,500,000 80%
Admin support staff 300,000 60%
Travel 250,000 90%
Photocopying 50,000 90%
Other operating costs 100,000 50%
Total $3,200,000 n/a
The firm desires a total profit of $640,000 before tax.
Costing a Service Job

• Total direct/traceable costs =

• Indirect/non-traceable costs =

• Overhead rate =

• Mark up percentage =
Costing a Service Job
Billing for Remco:
• Traceable costs =
• Overhead charge =
• Total costs =
• Mark-up =
• Bill amount =
Points to Note
• In a manufacturing company,
• Costs are accumulated in work-in-process accounts
• Direct costs are charged and indirect manufacturing costs or overhead costs are allocated
• Cost of goods manufactured is the amount transferred from work-in-process to
finished goods
• Cost of goods sold is the amount charged against revenues when goods are sold
• This flow applies to all “product” costs
• Period costs are expensed directly to the income statement!
Contribution Margin Income Statement
• Groups costs by their variability
• Not used for financial reporting
• Allows for decision making at various volume points
• Break-even analysis
The Gross Margin Income Statement
• Gross margin is the key term here. Item Amount

Revenue
• The gross margin statement:
• Carefully distinguishes as to whether cost is COGS
manufacturing or marketing Gross margin
• Does not care if cost is variable or fixed
Period costs
• It employs allocations to charge indirect
Profit
costs to individual units of specific products.
• Fixed manufacturing costs appear above the line
• Allocated to individual units of each product
The Contribution Margin Statement
Item Amount
• It captures cost structure.
Revenue
• Contribution margin is the key term here.
Variable costs
• The contribution margin statement:
Contribution margin
• Groups costs by fixed and variable costs
• Does not care about type of cost (mfg. vs. Fixed costs

mktg.) Profit

• It treats indirect capacity costs as being


fixed.
• Suitable for economic analysis of short-run
decision problems
Problem: Jindal Manufacturing Company
• Prepare the Income statement in contribution margin format
Case Study
• Phelps Industries
Questions/comments ?
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