While many Easy Learning (EL) customers develop their own educational content to use with the EL online learning platforms. some prefer to hire EL to develop content for them. Custom online content is produced by the EL Educational Consulting Department. This department is made up of education specialists and web developers. In addition, EL subcontracts custom online content development to a group of independent topical specialists. This is necessary because EL's customers are involved in a wide range of specialities and industries. Having full-time content development staff to cover the wide variety of topical areas would not be feasible.

The Educational Consulting Department uses a job order costing system. Each customer order for online content development is considered a "job." Costs of online content development fall into three main categories: costs of subcontracted work, direct in-house staff costs, and departmental overhead costs made up of other departmental costs that cannot be directly traced to a particular job. In-house staff are required to submit time sheets at the end of each week where they indicate total hours worked broken down by customer order. Direct costs including subcontracted work and direct in-house staff costs as well as an appropriate allocation of departmental overhead is charged against the revenue generated by each job as the jobs are completed. The department worked on several different jobs during the month. Information about two of these jobs, one for Smith & Valens and another for Walker & Chen, that were started and completed by the Educational Consulting Department this month is provided below: 

Overhead is allocated based on the actual costs incurred each month and the number of direct in house staff hours worked. Total overhead costs incurred by the department this month were $115,000, and 625 total in house staff hours were worked in the department during the month.

Claire Jackson, the CEO and founder of EL, is increasingly concerned with the economics of the business. Competition is increasing and she wants to make sure she understands the cost structure in each of the departments. To better understand how costs are accumulated and charged out to customers, Claire has identified the Educational Consulting Department as one of three departments where an ABC system will be implemented. An activity analysis indicates there are two main activities carried out within the Educational Consulting Department that generate overhead costs: technical support and administration. Technical support involves ensuring the content developed by outside subcontractors and the work carried out by in-house staff are integrated into a working product of high quality. Administration involves overseeing the work of in-house staff, ensuring deadlines are met and customer contracts are fulfilled as per agreed details. Activity cost pools and their measures are provided below:

Required

1. Analyze the total cost of each job under each method of allocating overhead. How do the costs differ? why? 

2. What insights can the CEO gain from the ABC costing experiment? Would you recommend that ABC be rolled out across the  organization? Why or why not?

Transcribed Image Text:

Smith & Valens Walker & Chen $45,000 Cost of subcontracted work. $85,000 Direct in-house staff costs. $ 5,000 $12,500 Total in-house staff hours worked. 425 hrs 150 hrs