Question:
Comparing costs from ABC and single-rate systems
This problem continues the Draper Consulting, Inc., situation from Problem. Recall that Draper allocated indirect costs to jobs based on a predetermined indirect cost allocation rate, computed as a percentage of direct labor costs. Because Draper provides a service, there are no direct materials costs. Draper is now considering using an ABC system. Information about ABC costs follows:
|
Activity
|
Budgeted Cost of Activity
|
Allocation Base
|
Cost Allocation Rate
|
|
Design
|
$ 350,000
|
Number of designs
|
$ 7,000
|
|
Programming
|
550,000
|
Direct labor hours
|
110
|
|
Testing
|
288,000
|
Number of tests
|
3,500
|
Records for two clients appear here:
|
Job
|
Total Direct Labor Costs
|
Total Number of Designs
|
Total Programming
Direct Labor Hours
|
Number of Tests
|
|
Tommy's Trains
|
$ 13,600
|
3
|
730
|
6
|
|
Marcia's Cookies
|
600
|
5
|
300
|
8
|
Requirements
1. Compute the total cost of each job.
2. Is the job cost greater or less than that computed in Problem 17-35 for each job? Why?
3. If Draper wants to earn gross profit equal to 25% of cost, how much (what fee) should it charge each of these two clients?