Department costing, service company. CKM is an architectural firm that designs and builds buildings.It prices each job on a cost plus 20% basis. Overhead costs in 2014 are $4,011,780. CKM's simple costingsystem allocates overhead costs to its jobs based on number of jobs. There were three jobs in 2014. Onecustomer, Sanders, has complained that the cost of its building in Chicago was not competitive. As a result, thecontroller has initiated a detailed review of the overhead allocation to determine if overhead costs are chargedto jobs in proportion to consumption of overhead resources by jobs. She gathers the following information.
Quantity of Cost Drivers Used byEach ProjectDepartment Cost DriverOverheadCosts in 2014 Sanders Hanley StanleyDesign Design department hours $ 1,500,000 1,000 5,000 4,000Engineering Number of engineers $ 500,030 2,000 2,000 2,200Construction Labor-hours $ 2,011,750 20,800 21,500 19,600$ 4,011,780
1. Compute the overhead allocated to each project in 2014 using the simple costing system.
2. Compute the overhead allocated to each project in 2014 using department overhead cost rates.
3. Do you think Sanders had a valid reason for dissatisfaction with the cost? How does the allocationbased on department rates change costs for each project?4. What value, if any, would CKM get by allocating costs of each department based on the activities donein that department?