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 costing system allocates overhead costs to its jobs based on number of jobs. There were three jobs in 2014. One customer, Sanders, has complained that the cost of its building in Chicago was not competitive. As a result, the controller has initiated a detailed review of the overhead allocation to determine if overhead costs are charged to jobs in proportion to consumption of overhead resources by jobs. She gathers the following information.

Required
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 allocation based 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 done in thatdepartment?

Transcribed Image Text:

Quantity of Cost Drivers Used by Each Project Overhead Department Cost Driver Costs in 2014 Sanders Hanley Stanley Design department hours $1,500,000 1,000 000 4000 2000 2,200 $2,011,750 20,800 21,500 19,600 Engineering Number of engineers Construction Labor-hours 500030 2,000 4,011,780