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 labour costs. A total of $300,000 in direct labour 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 totalled $450,000 for residential services and $330,000 for commercial services.

The management of Hodges and Associates would like to use activity-based costing to allocate overhead rather than a plantwide rate based on direct labour costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs.

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