Platinum Web Services designs and maintains websites for small business entrepreneurs. Competition has been intensifying in recent years and the company has been losing business to larger web design firms. Summary data concerning the last two years of operations follow:

The company applies its overhead costs to jobs using the hours of service provided as the allocation base. For example, this year and last year, 40 service-hours were required to maintain the website for a small company called Verde Consulting. All of Platinum’s overhead costs are fixed, and the actual overhead cost incurred was exactly as estimated at the beginning of the year in last year and this year.

Required:

1. Platinum Web Services computes its predetermined overhead rate at the beginning of each year based on the estimated overhead cost and the estimated hours of service demanded for the year. Using this approach, how much overhead would have been applied to the Verde Consulting job last year? How about this year?

2. The president of Platinum Web Services has heard that some companies in the industry have changed to a system of computing the predetermined overhead rate based on the hours of service available at capacity. He would like to know what effect this method would have on job costs. How much overhead cost would have been applied to the Verde Consulting job last year using this method? How much would have been applied his year?

3. If Platinum computes its predetermined overhead rate based on the hours of service available at capacity as in (2) above, how much unused capacity cost would the company have incurred last year? This year?

4. What fundamental business problem is Platinum Web Services facing? Which method of computing the predetermined overhead rate is likely to be more helpful in addressing this problem? Explain.

Transcribed Image Text:

Last Year This Year Estimated hours of service demanded. 1,000 800 Estimated overhead cost ... $160,000 $160,000 Actual hours of service provided . 750 500 Actual overhead cost incurred ... $160,000 $160,000 Hours of service available at capacity 1,600 1,600