138. Ace Architects employs two architects, each having a different area of specialization. Caitlin specializes in industrial commercial construction and Zachary specializes in residential construction. Ace expects to incur total overhead costs of $779,625 during the year and applies overhead based on annual salary costs. Caitlin is a senior partner, her annual salary is $168,750, and she is expected to bill 2,000 hours during the year. Zachary is a senior associate, his annual salary is $91,125, and he is expected to bill 1,800 hours during the year. a. Calculate the predetermined overhead rate. b. Assuming that the hourly billing rate should be set to cover the total cost of services plus a 20% markup, compute the hourly billing rates for Caitlin and Zachary. a. Predetermined Overhead Rate: $779,625/($168,750 + 91,125) = 300% of Salary Cost b. Caitlin's billing rate = Annual Salary + Overhead (300% of Salary) = $168,750 + $506,250 = $675,000/2,000 hours = $337.50 hourly cost. $337.50 x 1.20 = $405/hour billing rate. Zachary's billing rate = Annual Salary + Overhead (300% of Salary) = $91,125 + $273,375 = $364,500/1,800 hours = $202.50 hourly cost. $202.50 x 1.20 = $243/hour billing rate. Feedback: Predetermined overhead rate = Estimated overhead/Estimated allocation base. Hourly cost = (Annual salary + overhead)/estimated hours. Billing rate = hourly cost plus markup of 20%. AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-07 Apply job order costing to a service setting. Topic: Job order costing in a service firm
138. Ace Architects employs two architects, each having a different area of specialization. Caitlin specializes in industrial commercial construction and Zachary specializes in residential construction. Ace expects to incur total overhead costs of $779,625 during the year and applies overhead based on annual salary costs. Caitlin is a senior partner, her annual salary is $168,750, and she is expected to bill 2,000 hours during the year. Zachary is a senior associate, his annual salary is $91,125, and he is expected to bill 1,800 hours during the year. a. Calculate the predetermined overhead rate. b. Assuming that the hourly billing rate should be set to cover the total cost of services plus a 20% markup, compute the hourly billing rates for Caitlin and Zachary. a. Predetermined Overhead Rate: $779,625/($168,750 + 91,125) = 300% of Salary Cost b. Caitlin's billing rate = Annual Salary + Overhead (300% of Salary) = $168,750 + $506,250 = $675,000/2,000 hours = $337.50 hourly cost. $337.50 x 1.20 = $405/hour billing rate. Zachary's billing rate = Annual Salary + Overhead (300% of Salary) = $91,125 + $273,375 = $364,500/1,800 hours = $202.50 hourly cost. $202.50 x 1.20 = $243/hour billing rate. Feedback: Predetermined overhead rate = Estimated overhead/Estimated allocation base. Hourly cost = (Annual salary + overhead)/estimated hours. Billing rate = hourly cost plus markup of 20%. AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-07 Apply job order costing to a service setting. Topic: Job order costing in a service firm
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