John and Mary are friends from colleague. They both studied business administration at ZSEM. After graduating from college 5 years ago, they started working as audit assistants with various employers. Over the past five years, they have been promoted to the position of audit manager and had also passed the test for a CPA. However, they believe it is now time to start their own audit company which would be named Auditors LLC. At the beginning of October 2019, they received a decision from the Commercial court that the company Auditors LLC is registered in the court register. John and Mary are equal partners in the company, they both invested HRK150.000 as starting capital.

At the start of October 2019 managing partners John and Mary prepared the following cost budget for the year 2019:

• John and Mary will both work for the company as managing partners and their individual monthly salary is HRK20.000 (refers to 160 hours of work per month).

• They rented an office in an office building and will pay a monthly rent of HRK10.000, which includes equipment rental (printer and copying machine).

• They hired two audit assistants. The monthly salary of an assistant is HRK10.000 (refers to 160 hours of work per month).

 • They hired a secretary whose salary is HRK8.000 a month.

• They also hired one student on a student contract. An hourly rate of HRK30 has been agreed with the student. The student helps with office work (budgeted 40 hours a month.)

• They signed a contract with a teleoperator according to which the monthly costs of telephone and internet are budgeted to HRK1.500.

• The costs of cleaning and maintaining the business premises are budgeted to HRK2.000 per month (including overhead costs).

• The cost of office supplies is budgeted to HRK1.300 per month.

 

The company uses a job order costing system, in which each client is a different job. The company traces direct costs (direct labor and travel costs) to each job. Indirect costs are grouped into one cost group which is allocated to individual jobs based on a total budgeted direct working hours (partner + assistant), which for 2019 are budgeted to 1.400 hours.

In October 2019, four jobs (contracts) were started. Actual hours worked per job are:

1. Audit of the EU project Job no. 1-2019 - completed in October 2019

a. Partner hours spent - 80 hours

b. Assistant hours spent - 160 hours

 

2. Due diligence Job no. 2-2019 - completed in December 2019

a. Partner hours spent - 160 hours

b. Assistant hours spent - 280 hours

c. Travel costs – HRK5.000

 

3. Financial statements audit Job no. 3-2019 - from October to December 2019 (ongoing)

a. Partner hours spent - 160 hours

b. Assistant hours spent - 340 hours

 

4. Financial statements audit Job no. 4-2019 - completed in November 2019

a. Partner hours spent - 120 hours

b. Assistant hours spent - 120 hours

c. Travel costs – HRK10.000

 

The total actual indirect costs for 2019 are HRK240.000.

 

Required: 

1. What is the amount of budgeted indirect costs for 2019? (2 points)

2. Calculate the budgeted indirect cost allocation rate for 2019 (2 points)

3. Determine the total cost of each job started in October 2019 (6 points)

4. Determine the amount of under/overallocated indirect costs for 2019. (2 points)

5. Explain the advantages of using the budgeted indirect cost allocation rate over the actual indirect cost allocation rate. (Min 100 max 200 words) (8 points)