Chapter 2.B, Problem 2E

EXERCISE 2B-2 Overhead Rates and Capacity Issues LO2-1, LO2-2, LO2-6

Security Pension Services helps clients to set up and administer pension plans that are in compliance with tax laws and regulatory requirements. The firm uses a job-order costing system in which overhead is applied to clients^’ accounts on the basis of professional staff hours charged to the accounts. Data concerning two recent years appear below:

"Professional staff hours available" is a measure of the capacity of the firm. Any hours available that are not charged to clients⁷ accounts represent unused capacity. All of the firm’s overhead is fixed.

Required:

1. Marta Brinksi is an established client whose pension plan was set up many years ago. In both this year and last year, only 2.5 hours of professional staff time were charged to Ms. Brinksi⁷ s account. If the company bases its predetermined overhead rate on the estimated overhead cost and the estimated professional staff hours to be charged to clients, how much overhead cost would have been applied to Ms. Brinksi^’s account last year? This year?
2. Suppose that the company bases its predetermined overhead rate on the estimated overhead cost and the estimated professional staff hours to be charged to clients as in (l) above. Also suppose that the actual professional staff hours charged to clients accounts and the actual overhead costs turn out to be exactly as estimated in both years. How much unused capacity cost would the company report last year? How about for this year?
3. Refer back to the data concerning Ms. Brinksi in (l) above. If file company bases its predetermined overhead rate on the professional staff hours available, how much overhead cost would have been applied to Ms. Brinksi s account last year? This year?
4. Suppose that the company bases its predetermined overhead rate on the professional staff hours available as in (3) above. Also suppose that the actual professional staff hours charged to clients accounts and the actual overhead costs turn out to be exactly as estimated in both years. How much unused capacity cost would the company report last year⁹ How about for this year⁹