CKM is an architectural firm that designs and builds buildings. It prices each job on a cost plus 15% basis. Overhead costs in 2014 are $ 4,000,000. CKMs simple costing system allocates overhead costs to its jobs based on number of jobs. There were three jobs in 2014. One customer, Sanders, has complained that the cost of its building in Chicago was not competitive. As a result, the controller has initiated a detailed review of the overhead allocation to determine if overhead costs are charged to jobs in proportion to consumption of overhead resources by jobs. She gathers the following information.

Department Cost driver Overhead costs Hanley Stanley

Design Design depart. Hrs. 1,500,000 2000 4000

Engineering # of engineers 500,000 2,000 2,000

Construction Labor- hours 2,000,000 500 2,000

15% basis

1) Using the ABC system, what is the overhead cost rate for design activity?

2) Using the ABC system, what is the overhead allocated to project Hanley in 2014 using department overhead cost ratio?

3) Do you think Hanley had a valid reason for dissatisfaction with the cost? If so, what is the cause?

a) Yes, Hanley project uses less # of engineering than Stanley

b) Yes, Hanley project use less resources for every aspect than Stanley

c) Yes, Hanley project use less Labor Hours and design department hours than Stanley

d) No, It is fair allocation

e) None of the above

4) What value, if any, would CKM get by allocating costs of each department based on the activities done in that department?