Thomas Design is an interior design firm. The firm uses a job cost system, in which each client is a different job. Thomas Design traces direct labor, licensing costs, and travel costs directly to each job (client). It allocates indirect costs to jobs based on a predetermined indirect cost allocation rate computed as a percentage of direct labor costs.
At the beginning of the current year, managing partner Sarah Miracle prepared the following budget:
Direct labor hours (professional) ................................................. 10,000 hours
Direct labor costs (professional) .................................................... $1,400,000
Support staff salaries ....................................................................... $ 170,000
Computer leases ................................................................................ $ 49,000
Office supplies ................................................................................... $ 29,000
Office rent .......................................................................................... $ 60,000
Later that same year in November, Thomas Design served several clients. Records for two clients appear here:
Organic Foods AllNews.com
Direct labor hours...................................... 730 hours 25 hours
Software licensing costs....................................... $2,700 $400
Travel costs............................................................. $7,000 $ 0
Requirements
1. Compute Thomas Design's predetermined indirect cost allocation rate for the current year.
2. Compute the total cost of each of the two jobs listed.
3. If Thomas Design wants to earn profits equal to 30% of sales revenue, how much (what total fee) should the company charge each of these two clients?
4. Why does Thomas Design assign costs to jobs?