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Chapter 4: Problem 26

Frontier Partners, a management consulting firm, has the following condensed budget for 2017: Frontier has a single direct-cost category (professional labor) and a single indirect-cost pool (client support). Indirect costs are allocated to jobs on the basis of professional labor costs. 1\. Prepare an overview diagram of the job-costing system. Calculate the 2017 budgeted indirect-cost rate for Frontier Partners. 2\. The markup rate for pricing jobs is intended to produce operating income equal to \(10 \%\) of revenues. Calculate the markup rate as a percentage of professional labor costs. 3\. Frontier is bidding on a consulting job for Sentinel Communications, a wireless communications company. The budgeted breakdown of professional labor on the job is as follows: $$\begin{array}{ccc} \text { Professional Labor Category } & \text { Budgeted Rate per Hour } & \text { Budgeted Hours } \\ \hline \text { Director } & \$ 200 & 9 \\ \text { Partner } & 100 & 24 \\ \text { Associate } & 50 & 100 \\ \text { Assistant } & 30 & 220 \end{array}$$ Calculate the budgeted cost of the Sentinel Communications job. How much will Frontier bid for the job if it is to earn its target operating income of \(10 \%\) of revenues?

Short Answer

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{Markup Rate} = \frac{85,556}{220,000} \times 100 \] \[ \text{Markup Rate} = 38.89 \% \] The markup rate as a percentage of professional labor costs to achieve 10% operating income is 38.89%. #tag_title# Step 3: Budgeted Cost and Bid Price for Sentinel Communications Job #tag_content# Given the budgeted breakdown of professional labor for the Sentinel Communications job, we can calculate the budgeted cost as follows: \[ \text{Budgeted Cost} = (Director \ Hours \times Hourly \ Rate) + (Partner \ Hours \times Hourly \ Rate) + (Associate \ Hours \times Hourly \ Rate) + (Assistant \ Hours \times Hourly \ Rate) \] \[ \text{Budgeted Cost} = (9 \times 200) + (24 \times 100) + (100 \times 50) + (220 \times 30) \] \[ \text{Budgeted Cost} = 1,800 + 2,400 + 5,000 + 6,600 = 15,800 \] To calculate the bid price for the job to achieve the target operating income of 10% of revenue, we apply the markup rate: \[ \text{Bid Price} = \text{Budgeted Cost} \times (1 + \text{Markup Rate}) \] \[ \text{Bid Price} = 15,800 \times (1 + 0.3889) \] \[ \text{Bid Price} = 15,800 \times 1.3889 \] \[ \text{Bid Price} = 21,944.02 \] Frontier Partners would need to bid $21,944.02 for the Sentinel Communications job to achieve its target operating income of 10% of revenues.

Step by step solution

01

Overview Diagram and Budgeted Indirect-Cost Rate

To prepare a diagram of the job-costing system, we first need to calculate the indirect-cost rate. We're given the following budget information: - Direct costs: Professional Labor (\[ c_{direct} = 220,000 \]) - Indirect costs: Client Support (\[ c_{indirect} = 55,000 \]) Indirect-cost rate can be calculated as: \[ rate = \frac{c_{indirect}}{c_{direct}} \] Now, plug in the numbers: \[ rate = \frac{55,000}{220,000} = 0.25 \] The 2017 budgeted indirect-cost rate for Frontier Partners is 25%.
02

Markup Rate as a Percentage of Professional Labor Costs

To calculate the markup rate that would produce an operating income equal to 10% of revenues, we use the following formula: \[ \text{markup rate} = \frac{\text{target operating income}}{\text{total cost}} \times 100 \] First, let's find the total cost. Since the indirect costs are allocated based on professional labor costs, the total cost is simply the sum of direct costs and indirect costs: \[ Total \ Cost = c_{direct} + c_{indirect} \] \[ Total \ Cost = 220,000 + 55,000 = 275,000 \] Next, let's find the target operating income by multiplying the total cost by 10%: \[ Target \ Operating \ Income = 0.1 \times Revenue \] \[ Revenue = \frac{Total \ Cost}{(1-0.10)} \] \[ Revenue = \frac{275,000}{0.9} = 305,556 \] Now compute the markup rate: \[ \text{Markup Rate} = \frac{305,556 - 220,000}{220,000} \times 100 \] \[ \text

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Indirect-Cost Rate
In job costing, understanding the indirect-cost rate is crucial. Indirect costs are those that cannot be directly traced to a specific product or service, yet are necessary for the running of the business. In the case of Frontier Partners, these are costs related to client support. To allocate these costs to jobs, companies calculate an indirect-cost rate. This rate helps in spreading the indirect costs across all jobs proportionally.To calculate the indirect-cost rate for Frontier Partners, we need the budgeted indirect costs and the direct costs, which in this example are professional labor costs. The formula used is:\[ \text{Indirect-Cost Rate} = \frac{\text{Indirect Costs}}{\text{Direct Costs}} \]For Frontier, this sums up to 0.25 or 25%. This means for every dollar spent on direct professional labor, an additional $0.25 is spent on indirect costs.
Markup Rate Calculation
Calculate the correct markup rate to ensure profitability. The markup rate is the percentage added to a job's total cost to determine its selling price, ensuring a desired level of profitability.Frontier Partners aims for an operating income of 10% of revenues. First, calculate total job costs by summing direct and indirect costs. Then, determine the revenue needed to achieve that 10% target. The formula for this process utilizes a key math relation:\[ \text{Revenue} = \frac{\text{Total Cost}}{1 - \text{Target Operating Income Percentage}} \]Once revenue is found, the markup rate is:\[ \text{Markup Rate} = \left( \frac{\text{Revenue} - \text{Direct Costs}}{\text{Direct Costs}} \right) \times 100 \]By working through these calculations, Frontier ensures each job yields adequate profit demonstrating the importance of strategic pricing.
Professional Labor Costs
Professional labor costs are the direct costs associated with the employees working on a project. At Frontier Partners, these costs are determined by the labor categories and the hours spent on a job. Each category, such as Director or Assistant, has a specified hourly rate, contributing to the total professional labor cost. The calculation of professional labor cost for each category involves:
  • Identifying the hourly rate for each role
  • Multiplying the hourly rate by the number of hours budgeted
Summing these products gives the total professional labor cost for a project. This aids not only in budgeting but also in evaluating the efficiency of labor investments in various roles.
Budgeted Cost Calculation
Budgeted cost calculation is essential for determining how much a project will cost before it starts. It provides an estimate that helps in setting prices and managing resources efficiently. For a consulting job like the one for Sentinel Communications, this involves considering each category of labor and their respective rates.Use the formula:\[ \text{Budgeted Cost for Labor} = \sum (\text{Rate per Hour} \times \text{Budgeted Hours}) \]Calculate separately for each category of professional labor and add them up. The total of these calculations is the estimated cost for the job. Then, add indirect costs using the already calculated indirect-cost rate to achieve the total budgeted cost. This process ensures accurate pricing and cost control, especially while bidding for new projects.

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Most popular questions from this chapter

Describe three alternative ways to dispose of under- or overallocated overhead costs.

Job costing; actual, normal, and variation from normal costing. Cheney \(\&\) Partners, a Quebecbased public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (audit support, which contains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Cheney \& Partners employs 10 professionals to perform audit services. $$\begin{array}{|c|l|r|r|} \hline & \multicolumn{1}{|c|} {\mathrm{A}} & \multicolumn{1}{|c|} {\mathrm{B}} & \multicolumn{1}{|c|} {\mathrm{C}} \\ \hline 1 & \multicolumn{1}{|c|} {\text { Cheney \& Partners }} \\ \hline 2 & \text { Budget for 2017 } & & \\ \hline 3 & \text { Professional labor compensation } & \$ 960,000 & \\ \hline 4 & \text { Audit support department costs } & 720,000 & \\ \hline 5 & \text { Professional labor-hours billed to clients } & 16,000 & \text { hours } \\ \hline 6 & & & \\ \hline 7 & \text { Actual results for 2017 } & & \\ \hline 8 & \text { Audit support department costs } & \$ 744,000 & \\ \hline 9 & \text { Professional labor-hours billed to clients } & 15,500 & \text { hours } \\ \hline 10 & \text { Actual professional labor cost rate } & \$ & 53 & \text { per hour } \\ \hline \end{array}$$ 1\. Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2017 under (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. 2\. Which job-costing system would vou recommend Cheney \& Partners use? Explain 3\. Cheney's 2017 audit of Pierre \& Co. was budgeted to take 170 hours of professional labor time. The actual professional labor time spent on the audit was 185 hours. Compute the cost of the Pierre \& \(c\) o audit using (a) actual costing, , (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. Explain any differences in the job cost.

The University of Chicago Press is wholly owned by the university. It performs the bulk of its work for other university departments, which pay as though the press were an outside business enterprise. The press also publishes and maintains a stock of books for general sale. The press uses normal costing to cost each job. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead, allocated on the basis of direct manufacturing labor costs. 1\. Prepare an overview diagram of the job-costing system at the University of Chicago Press. 2\. Prepare journal entries to summarize the 2017 transactions. As your final entry, dispose of the year-end under- or overallocated manufacturing overhead as a write-off to cost of Goods Sold. Number your entries. Explanations for each entry may be omitted. 3\. Show posted T-accounts for all inventories, cost of Goods Sold, Manufacturing Overhead Control, and Manufacturing Overhead Allocated. 4\. How did the University of Chicago Press perform in \(2017 ?\)

In each of the following situations, determine whether job costing or process costing would be more appropriate. a. A CPA firm b. An oil refinery c. A custom furniture manufacturer d. A tire manufacturer e. A textbook publisher f. A home builder g. An advertising agency h. A dairy i. A flour mill 隆; A paint manufacturer k. A nursing home 1\. A landscaping company m. An orange juice concentrate producer n. A movie studio 0\. A law firm P. A commercial aircraft manufacturer q. A management consulting firm r. A cell phone battery manufacturer s. A catering service t. A paper mill u. A computer repair shop

What is the advantage of using computerized source documents to prepare job- cost records?
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