1. Compute the overhead application rate based on last year’s costs. 2. Suppose last year’s costs were reclassified so that $3 million would be regarded as direct costs instead of overhead. Compute the overhead application rate as a percentage of direct

 Choice of Cost-Allocation Bases in Accounting Firm)
Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is
considering the desirability of tracing more costs to jobs than just direct labor. In this way, the firm
will be able to justify billings to clients.
Last year’s costs were
Direct-professional labor $ 5,000,000
Overhead 10,000,000
Total costs $15,000,000
The following costs were included in overhead:
Computer time $ 750,000
Secretarial cost 700,000
Photocopying 250,000
Fringe benefits to direct labor 800,000
Phone call time with clients
(estimated but not tabulated) 500,000
Total $3,000,000
The firm’s data processing techniques now make it feasible to document and trace these costs to individual
jobs.
As an experiment, in December Brenda McCoy arranged to trace these costs to six audit engagements.
Two job records showed the following:
Engagement
Eagledale Company First Valley Bank
Direct-professional labor $15,000 $15,000
Fringe benefits to direct labor 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
ISBN: 0-536-47129-0
Introduction to Management Accounting: Chapters 1-17, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton,
David Burgstahler, and Jeff Schatzberg. Published by Prentice Hall. Copyright © 2008 by Pearson Education, Inc.
624 Part 4: Product Costing