Chapter 5, Problem 31E

Methods of Estimating Costs: Account Analysis

Records at Hal’s Accounting Services show the following costs for year 1:

Production was 25,000 billable hours. Fixed overhead was $700,000.

Assuming no change in billable hours in year 2, direct materials and supplies costs are expected to increase by 10 percent. Direct labor costs are expected to increase by 5 percent. Variable overhead per billable hour is expected to remain the same, but fixed overhead is expected to increase by 5 percent.

Required

1. a.      Year 2 production is expected to be 20,000 billable hours. What are the estimated direct materials, direct labor, variable overhead, and fixed overhead costs for year 2?
2. b.      Determine the total costs per billable hour for year 1 and year 2.