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Cost driver rates

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Job Order costing, consulting

Lee Consulting computes the cost of each consulting engagement by adding a portion of firmwide support costs to labor cost of the consultants on the engagement. The support costs are assigned to each consulting engagement using a cost driver rate based on consultant labor costs. Lee Consulting's support costs are $5 million per year, and total consultant labor cost is estimated at $2.5 million per year.

A. What is Lee Consulting's support cost driver rate?
B. If the consultant labor cost on an engagement is $25,000, what cost will Lee Consulting compute as the total cost of the consulting engagement?

Single rate versus department rates

West Wood Products has 2 production depts.: cutting & assembly. The company has been using a single predetermined cost driver rate based on plantwide direct labor hours. That is, the plantwide cost driver rate is computed by dividing plantwide support costs by total plantwide direct labor hours. The estimates for support costs & quantities of cost drivers for 2006 follow:

Mfg. Support - Cutting $25,000
Assembly $35,000
Total $60,000

Direct Labor Hours - Cutting $1000
Assembly $3000
Total $4000

Machine Hours - Cutting $4000
Assembly $2000
Total $6000

A. What was the single plantwide cost driver rate for 2006?
B. Determine departmental cost driver rates based on direct labor hours for assembly & machine hours for cutting.
C. Provide reasons why West Wood might use the method in (A) or in (B).

Fluctuating cost driver rates, effect on markup pricing

Morris Company carefully records its costs because it bases prices on the cost of the goods it manufactures. Morris also carefully records its machine usage & other operational information. Mfg. costs are computed monthly & prices for the next month are determined by adding a 20% markup to each product's mfg. costs. The support activity cost driver rate is based on machine hours, shown below:

Jan 1350
Feb 1400
Mar 1500
Apr 1450
May 1450
June 1400
July 1400
Aug 1400
Sept 1500
Oct 1600
Nov 1600
Dec 1600

Profits have been acceptable until the past year, but Morris has recently faced increased competition. The marketing mgr. reported that Morris' sales force finds the company's pricing puzzling. When demand is high, the company's prices are low & when demand is low, the company's prices are high. Practical capacity is 1500 machine hours per month. Practical capacity is exceeded in some months by operating the machines overtime beyond regular shift hours. Monthly machine-related costs, all fixed, are $70,000 per month.

A. Compute the monthly support cost driver rates that Morris used last year.
B. Suggest a better approach to developing cost driver rates for Morris & explain why your method is better.

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