Anderson & Little is an advertising agency. The firm uses a job cost system in which each client is a different "job." Anderson & Little traces direct labor, software licensing costs, and travel costs directly to each job (client). The company allocates indirect costs to jobs based on a predetermined indirect cost allocation rate based on direct labor hours.
At the beginning of the current year, managing partner Trang Anderson prepared a budget:
Direct labor hours (professional) ........................................................... 17,100 hours
Direct labor costs (professional) .............................................................. $2,052,000
Support staff salaries ................................................................................. $ 160,000
Rent and utilities .......................................................................................... $ 48,000
Supplies ..................................................................................................... $ 461,300
Lease payments on computer hardware ..................................................... $ 66,000
During January of the current year, Anderson & Little served several clients. Records for two clients appear here:
DreamVacation.com Port Armour Golf Resort
Direct labor hours................. 750 hours 30 hours
Software licensing costs................. $2,500 $150
Travel costs ...................................... $8,000 $ 0
Requirements
1. Compute Anderson & Little's predetermined indirect cost allocation rate for the current year based on direct labor hours.
2. Compute the total cost of each job.
3. If Anderson & Little wants to earn profits equal to 20% of sales revenue, how much (what total fee) should it charge each of these two clients?
4. Why does Anderson & Little assign costs to jobs?