Smith Inc. bids on design jobs, but the new ones, are negotiated on a cost-plus basis. Cost-plus means that the buyer is willing to pay the actual cost plus a return (profit) on product costs to Smith. (Cost-plus means if the total Job cost were $5.00 at 30% cost-plus, the selling price would be $6.50 with $1.50 as profits to Smith) Jane Doe, a controller for Smith, has recently returned from a meeting where the manager stated that he wanted her to find a way to charge most of the company's costs to projects that are on a cost-plus basis. The manager noted that the company needed more profits to meet its stated goals in this period. By charging more costs to the cost-plus projects and therefore fewer costs to the recurring set price jobs, the company should be able to increase its profits for the current year. Jane knew why the president wanted to take this action. Some hearsay tells that he was looking for a new job with another company and, if the company reported strong profits, the manager's opportunities would be better for his new position. Jane also recognized that she could probably increase the cost of certain jobs by changing the activity basis used to allocate the manufacturing overhead. The current cost base used to allocate manufacturing overhead was using direct labor hours. Smith current revenue streams are made up of 75% new bids and 25% recurring contract jobs with set pricing. This is based on 500 jobs completed in the year. Using the cost information in Table 1 answer the following question. What allocation base could Jane use to achieve the managers request? (Hint: calculate the predetermined overhead rates for the current allocation and your purposed allocation(s) using the different activity base. Include all possible options before deciding). Quantify the difference between using direct labor hours to allocate manufacturing overhead and your selected allocation base that you used to achieve your manager's request (per job on average).

Table 1:

Average Average hours Per New Bid Job Average hours Per Contract Job Annual Total All Jobs Cost rate Direct Labour Design team Layout Printing labour $95/hour $75/hour $25/hour 18 6 50 5 4 90 7,375 Hours 2,750 Hours 30,000 Hours 40,125 Hours Direct Material Paper costs $10/LB 800 Lbs 1200 Lbs 450,000 LBS Other annual cost for the year Executive Sales and Admin Salaries Factory Janitorial and security wages Ink Supplies Factory Utilities and supplies Shipping Costs Website Costs Printing Equipment Depreciation Factory Supervisor Factory Insurance costs $400,000 $90,000 $340,000 $50,000 $10,000 $8,000 $9,000 $85,000 $15,000 $1,007,000 Average Average hours Per New Bid Job Average hours Per Contract Job Annual Total All Jobs Cost rate Direct Labour Design team Layout Printing labour $95/hour $75/hour $25/hour 18 6 50 5 4 90 7,375 Hours 2,750 Hours 30,000 Hours 40,125 Hours Direct Material Paper costs $10/LB 800 Lbs 1200 Lbs 450,000 LBS Other annual cost for the year Executive Sales and Admin Salaries Factory Janitorial and security wages Ink Supplies Factory Utilities and supplies Shipping Costs Website Costs Printing Equipment Depreciation Factory Supervisor Factory Insurance costs $400,000 $90,000 $340,000 $50,000 $10,000 $8,000 $9,000 $85,000 $15,000 $1,007,000