Estimated Quantity of Allocation Base Allocation Base Allocation Rate 900 visits Predetermined Estimated Cost Overhead Activity Site risits Documentation preparation $ 45,000 Number of visits 122,500 Number of pages $ 167,500 $ 50 per visit $ 35 per page 3,500 pages Total indirect costs Allocation Base Client 76 Direct labor hours 60 Visits Pages 50
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Using ABM in a service company
Haworth Company is a management consulting firm. The company expects to incur $167,500 of indirect costs this year. Indirect costs are allocated based on the following activities:
Haworth bills clients at 120% of the direct labor costs. The company has estimated direct labor costs at $240 per hour. Last month, Haworth completed a consulting job for Client 76 and used the following resources:
Determine the total cost of the consulting job and the operating income earned.
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