Hodges and Associates is a small firm that provides structural engineering services for its clients. The company performs structural engineering services for both residential and commercial buildings. Last year, total overhead costs of \($330,000\) were allocated based on direct labor costs. A total of \($300,000\) in direct labor costs were incurred in the following areas: \($120,000\) in the residential segment and \($180,000\) in the commercial segment. Direct materials used were negligible and are included in overhead costs. Sales revenue totaled \($450,000\) for residential services and \($330,000\) for commercial services. Management of Hodges and Associates would like to use activity-based costing to allocate overhead rather than a plantwide rate based on direct labor costs.

The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs.

Required

a. 

(1) Using the plantwide allocation method, calculate the total cost for each product. Product costs here include overhead and direct labor. 110% of direct labor costs 

(2) Using the plantwide approach, calculate the profit for each product. Also calculate profit as a percent of sales revenue for each product. Round the results to the nearest tenth of a percent.

b. 

(1) Using activity-based costing, calculate the predetermined overhead rate for each activity. Steps 1 through 3 in the activity-based costing process have already been done for you—this is step 4.

(2) Using activity-based costing, calculate the amount of overhead assigned to each product. Round the result to the nearest tenth of a percent.

(3) Using activity-based costing, calculate the profit for each product. Also calculate profit as a percent of sales revenue for each product. Round the results to the nearest tenth of a percent.

c. What caused the shift of overhead costs to the residential product using activity-based costing? How might management use this information to make improvements within the company?

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Estimated Cost Estimated Driver Activity Overhead Activity Scheduling and data entry Computer maintenance Processing permit Direct labor hours Cost Driver Costs Residential Commercial Total $100,000 4,500 3,500 8,000 Number of computer hours 70,000 8,000 12,000 20,000 applications Number of applications 160,000 400 400 800 Total $330,000