Reference no: EM131505267
Question: Lubbock Engineering Consultants is a firm of professional civil engineers. It mostly does surveying jobs for the heavy construction industry throughout Texas. The firm obtains its jobs by giving fixed-price quotations, so profitability depends on the ability to predict the time required for the various subtasks on the job.
(This situation is similar to that in the auditing profession, where times are budgeted for such audit steps as reconciling cash and confirming accounts receivable.) A client may be served by various professional staff, who hold positions in the hierarchy from partners to managers to senior engineers to assistants. In addition, there are secretaries and other employees. Lubbock Engineering has the following budget for 2016:
Compensation of profesional staff $3,600,000
Other costs 1,449,000
Total budgeted costs $5,049,000
Each professional staff member must submit a weekly time report, which is used for charging hours to a client job-order record. The time report has seven columns, one for each day of the week. Its rows are as follows:
• Chargeable hours Client 156 Client 183 Etc.
• Nonchargeable hours Attending seminar on new equipment Unassigned time Etc.
In turn, these time reports are used for charging hours and costs to the client job-order records. The managing partner regards these job records as absolutely essential for measuring the profitability of various jobs and for providing an "experience base for improving predictions on future jobs."
a. The firm applies overhead to jobs at a budgeted percentage of the professional compensation charged directly to the job ("direct labor"). For all categories of professional personnel, chargeable hours average 85% of available hours. Nonchargeable hours are regarded as additional overhead. What is the overhead rate as a percentage of "direct labor," the chargeable professional compensation cost?
b. A senior engineer works 48 weeks per year, 40 hours per week. His compensation is $60,000. He has worked on two jobs during the past week, devoting 10 hours to Job #156 and 30 hours to Job #183. How much cost should be charged to Job #156 because of his work there?