Allocations Using Simplified Costing Versus Activity-Based Costing

Carson and Peyton

Carson and Peyton, architects, have been using a simplified costing system in which all professional labor costs are included in a single direct cost category, professional labor; and all overhead costs are included in a single indirect cost category, professional support, and allocated to jobs by using professional labor hours as the allocation base. Consider two clients: Henry’s Restaurant, which required 25 hours of design work for a new addition, and O. Cinco, who required plans for a new ultramodern home that took 40 hours to draw. The firm has two partners, who each earn a salary of $150,000 a year, and four associates, who each earn $60,000 per year. Each professional has 1,500 billable hours per year. The professional support is $1,080,000, which consists of $700,000 of design support and $380,000 of staff support. Henry’s job required five hours of partner time and 20 hours of associate time. Cinco’s job required 30 hours of partner time and 10 hours of associate time.

Required:

1. Prepare job cost sheets for Henry’s Restaurant and O. Cinco, using a simplified costing system with one direct and one indirect cost pool.

2. Prepare job cost sheets for the two clients, using an activity-based costing system with two direct cost categories—partner labor and associate labor—and two indirect cost categories—design support and staff support. Use professional labor dollars as the cost allocation base for design support and professional labor hours for staff support. (Round rates to two decimal places.)

3. Determine the amount by which each job was under- or – over coasted, using the simplified costing system.