The managing partner of Ace Accounting is considering the desirability of tracing more costs to jobs than just direct labour. In this way, the firm will be able to justify billings to clients.

Costs for the prior year (2021) were:

Direct professional labour: $5,000,000

Overhead: 10,000,000

Total costs: $15,000,000

The following costs were included in overhead:

Computer time: $750,000

Secretarial costs: 700,000

Photocopying: 250,000

Employee benefits for direct labour: 800,000

Phone call time with clients: 500,000

Total: $3,000,000

The firms data processing techniques now make it feasible to document and trace these costs to six audit engagements. Two job records showed the following:

Engagement

	Smith Company	Metro Bank
Direct professional labour	$15,000	$15,000
Employee benefits for direct labour	3,000	3,000
Phone call time with clients	1,500	500
Computer time	3,000	700
Secretarial costs	2,000	1,500
Photocopying	500	300
Total direct costs	$25,000	$21,000

Required:

Compute the overhead application rate based on last years (2021) costs.

Suppose last years (2021) costs were reclassified so that the $3 million would be regarded as direct costs instead of overhead. Compute the overhead application rate as a percentage of direct labour and total direct costs.

Using the three rates computed in requirements a) and b), compute the total costs of the engagements for Smith Company and Metro Bank.

Suppose that client billing was based on 30 percent markup of total job costs. Compute the billings that would be forthcoming in requirement c).

Which method of job costing and overhead application do you favour? Explain.