27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Classifying costs

Geek Gut Company provides computer repair services for the community. Obie Won’s computer was not working, and he called Geek Chic for a home repair visit. Geek Chic Company’s technician arrived at 2:00 PM to begin work. By 4:00 PM, the problem was diagnosed as a Jailed circuit board. Unfortunately, the technician did not have a new circuit board in the truck because the technician’s previous customer had the same problem and a board was used on that visit. Replacement boards were available back at Geek Chic Company’s shop. Therefore, the technician drove back to the shop to retrieve a replacement board. From 4:00 to 5:00 mi, Geek Chic Company’s technician drove the round trip to retrieve the replacement board from the shop.

At 5:00 PM. the technician was back on the job at Obie’s home. The replacement procedure is somewhat complex because a variety of tests must be performed once the board is installed. The job was completed at 6:00 PM.

Obie’s repair bill showed the following:

Circuit board $100
Labor charges 300
Total $400

Obie was surprised at the size of the bill and asked for more detail supporting the calculations. Geek Chic Company responded with the following explanations:

Cost of materials:  
Purchase price of circuit board $ 80
Markup on purchase price to cover storage and handling 20
Total materials charge $100

The labor charge per hour is detailed as follows:

2:00-3:00 PM $ 70
3:00-4:00 PM 60
4:00-5:00 PM 80
5:00-6:00 PM 90
Total labor charge $ 300

Further explanations in the differences in the hourly rates are as follows:

first hour:  
Base labor rate…………………….. $42
Fringe benefits……………………… 10
Overhead(other than storage and handling)…….. 8
Total base labor rate…………… $ 60
Additional charge for first hour of any job to cover the cost of vehicle depreciation, fuel, and employee time in transit. A 30-minute transit time is assumed……….. 10
Third hour:  
Base labor rate ………… $ 60
The trip back to the shop includes vehicle depreciation and fuel; therefore, a charge was added to the hourly rate to cover these costs. The round trip took an hour……… 20
Fourth hour:  
Base labor rate ………… $60
Overtime premium for time worked in excess of an eight-hour day(starting at 5:00 PM) is equal to 1.5 times the base rate…………………………. 30
  $ 90

1.    If you were in Obie's position, how would you respond to the bill? Are there parts of the bill that appear incorrect to you? If so, what argument would you employ to convince Geek Chic Company that the bill is too high?

2.    Use the headings that follow to construct a table. Fill in the table by listing the costs identified in the activity in the left-hand column. For each cost, place a check mark in the appropriate column identifying the correct cost classification. Assume that each service call is a job.

Cost Direct Materials Direct Labor Overhead


To determine


A cost indicates the payment of cash or the obligation to pay the cash in the future period for the generation of revenue or the service performed.

Direct Material cost:

Direct material cost is the cost of the material which is directly involved in the production. It constitutes the major portion of the total cost of the finished product. For example: The cost of plastic is the direct material for manufacturing a bottle.

Direct Labor Cost:

Direct labor cost is the cost of the labor paid to the employees who are directly involved in converting the raw materials to the finished products. It constitutes the major portion of the total cost of the finished product. For example: Wages paid to the mechanic for repairing an automobile.

Factory Overhead Cost:

Factory overhead cost is the cost other than the direct material cost, and the direct labor cost which is not directly involved in the production of converting the raw materials to the finished products. If the direct material cost or direct labor cost does not constitute the major portion of the total cost of the finished product, then it may be classified as the factory overhead cost. For example: Cost of repairing, and maintaining factory equipment.

To argue: The bill charged by the company is too high.


Mr. O can raise the following appropriate arguments:

  • In the third hour, the technician has added a trip back to the shop in the bill for which he has charged $80. In this case, the technician should not charge bill for the whole hour since it is the responsibility of the technician to keep the spares (circuit board) with him. Overall the trip was non productive time that should not have been charged directly. Thus, stocking out of circuit board is the result of this hourly charges hence Mr. O is not responsible for this error.
  • In the fourth hour, the technician has charged for the overtime premium. Mr. O received the overtime premium since it is his misfortune that he was the last client of the day. What if he would have been appointed first in the morning? There would not be any overtime premium. Also if the technician would have not gone back to the shop there would not be any overtime premium. Therefore Mr. O should have not been charged directly and should charge only if the overtime premium caused by him or required by him.
  • Thus, the bill that should be charged for the labor portion must be only ($70 + $60 + $60) $190


To determine

To identify: The correct cost classification and assume that each service call is a job.

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