Ye Olde Bump & Grind, Inc., is an automobile body and fender repair shop. Repair work is done by hand and with the use of small tools. Customers are billed based on time (direct labor hours) and materials used in each repair job.

The shop’s overhead costs consist primarily of indirect materials (welding materials, metal putty, and sandpaper), rent, indirect labor, and utilities. Rent is equal to a percentage of the shop’s gross revenue for each month. The indirect labor relates primarily to ordering parts and processing insurance claims. The amount of indirect labor, therefore, tends to vary with the size of each job.

Henry Lee, manager of the business, is considering using either direct labor hours or number of repair jobs as the basis for allocating overhead costs. He has estimated the following amounts for the coming year:

Estimated total overhead . . . . . . . . . . . . . . . . . . . . . . . $123,000

Estimated direct labor hours . . . . . . . . . . . . . . . . . . . . . 10,000

Estimated number of repair jobs . . . . . . . . . . . . . . . . . . 300

Instructions

a. Compute the overhead application rate based on (1) direct labor hours and (2ik) number of repair jobs.

b. Shown below is information for two repair jobs:

Job 1 Repair a dented fender. Direct material used, $25; direct labor hours, 5; direct labor cost, $75.

Job 2 Repair an automobile involved in a serious collision. Direct materials used, $3,800; direct labor hours, 200; direct labor cost, $3,000.

Determine the total cost of each repair job, assuming that overhead costs are applied to each job based on:

1. Direct labor hours.

2. Number of repair jobs.

c. Discuss the results obtained in part b. Which overhead application method appears to provide the more realistic results? Explain the reasoning behind your answer, addressing the issue of what “drives” overhead costs in this business.