# Acc206 Principles of Accounting: P18-37 Recall that Draper allocated indirect costs to jobs based

Acc206 Principles of Accounting

P18-37 Comparing costs from ABC and single-rate systems [30-40 min]

This problem continues from Draper Consulting, Inc., situation from Problem 17-35 of Chapter 17.

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 costs greater or less than the 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?

P18-37 Comparing costs from ABC and single-rate systems [30-40 min]

This problem continues from Draper Consulting, Inc., situation from Problem 17-35 of Chapter 17.

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 costs greater or less than the 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?

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