The Hillman Company sells and services lawn mowers, snow blowers,and other equip

Question

The Hillman Company sells and services lawn mowers, snow blowers,and other equipment. The service department uses a job ordercost system to determine costs of each job, such as oil changes,tuneups, and repairs. The department assigns conversion coststhrough a cost driver rate on the basis of direct laborhours. The cost driver rate additionally includes a markup of25% on the job's conversion costs in order to provide a reasonableprofit for Hillman. The customer's invoice itemizes pricesfor parts and labor, where the stated labor rate is thedepartment's cost driver rate that includes direct labor costs,assigned overhead costs and the 25% markup on conversioncosts. Hillman company's service department estimated thefollowing information for 2006:
Salaries ofmechanics                 120,000
Fringebenefits                             54,000
General andadministrative            18,000
Depreciation                                  42,000
Billable direct laborhours                 4,500

a. Determine Hillman Company's service department's costdriver rate to be used to assign conversion costs on the basis ofbillable direct labor costs.

b. Job 254 required 47.40 of materials and 0.7 direct laborhours. Determine the price charged for job 254.

Explanation / Answer

$120,000

$54,000

$18,000

$42,000

$234,000

4,500 hours

$52.00

$13.00

$65.00 per directlabor hour

Salaries of mechanics

$120,000

Fringe benefits

$54,000

General administrative

$18,000

Depreciation

$42,000

            Total

$234,000

Billable direct labor hour

4,500 hours

Cost driver rate $234,000 / 4,500 hours

$52.00

Add : Mark up 25% i.e. $52 x 25%

$13.00

Applicable Cost driver rate ($52+ $13)

$65.00 per directlabor hour

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