Chan and Associates provides wetlands design and maintenance services for its customers, most of whom are developers. Billing is based on costs plus a 30 percent markup. Thus, costs are allocated to customers rather than to products.

Total overhead costs this coming year are expected to be \($2,000,000\) (\($600,000\) in the the company’s Design Department, and \($1,400,000\) in its Wetlands Maintenance Department). Direct labor costs are expected to total \($800,000\) (used for the plantwide rate). The Design Department expects to incur direct labor costs of \($500,000,\) and the Wetlands Maintenance Department expects to work 30,000 direct labor hours (this information is used for the department rates).

Required

a. Assume Chan and Associates uses the plantwide approach to allocating overhead costs and direct labor costs as the allocation base. Calculate the predetermined overhead rate, and explain how this rate will be used to allocate overhead costs. Round the rate to the nearest cent.

b. Assume Chan and Associates uses the department approach for allocating overhead costs. Calculate the predetermined overhead rate for each department, and explain how these rates will be used to allocate overhead costs. Round rates to the nearest cent.

c. What are two possible interpretations of the term costs in the following statement? “Customers are billed based on costs plus a 30 percent markup.”