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Labor Costs in the Service Sector

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Consider the following budgeted data for a client job of Bob Crachit's accounting firm. The client wants a fixed price quotation.

Direct professional labor
$20,000
Direct support labor
10,000
Fringe benefits for direct labor
13,000
Photocopying
2,000
Telephone calls
2,000
Computer equipment
6,000

Overhead is allocated at the rate of 100% of direct labor cost.

REQUIRED:
A. Prepare a schedule of the budgeted total costs for the client. Show subtotals for total direct labor costs and total costs as a basis for markup.
B. Assume that the partner's policy is to quote a fixed fee at 10% above the total costs. What fee would be quoted?
C. Explain why the listed estimates for costs might not be similar to the actual costs for the job. What factors could affect the accuracy of these estimates? List as many factors as you can.

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Solution Preview

A.
Total direct labor costs = $ 43,000
Total Overhead costs = $ 10,000

Total costs before mark up= $ 53,000
Total costs after mark up = $ 86,000

B.
Fixed fee = 10% * $ 53,000 = $ ...

Solution Summary

This solution answers various questions regarding labor costs in the service sector.

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2- 28 Inventoriable costs versus period costs. Each of the following cost items pertains to one of these companies: General Electric (a manufacturing- sector company), Safeway ( a merchandising- sector company), and Google ( a service- sector company):
a. Perrier mineral water purchased by Safeway for sale to its customers
b. Electricity used to provide lighting for assembly- line workers at a General Electric refrigerator-assembly plant
c. Depreciation on Google's computer equipment used to update directories of Web sites
d. Electricity used to provide lighting for Safeway's store aisles
e. Depreciation on General Electric's computer equipment used for quality testing of refrigerator components during the assembly process
f. Salaries of Safeway's marketing personnel planning local- newspaper advertising campaigns
g. Perrier mineral water purchased by Google for consumption by its software engineers
h. Salaries of Google's marketing personnel selling banner advertising

Required:
1. Distinguish between manufacturing- sector, merchandising- sector, and service- sector companies. 2. Distinguish between inventoriable costs and period costs.
3. Classify each of the cost items (a- h) as an inventoriable cost or a period cost. Explain your answers.

2.16
Computing and interpreting manufacturing unit costs. Minnesota Office Products ( MOP) produces three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its own dedicated production line at the plant. It currently uses the following three- part classification for its manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total manufacturing overhead costs of the plant in July 2008 are $ 150 million ($ 20 million of which are fixed). This total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line. Summary data (in millions) for July 2008 are as follows:

Supreme Deluxe Regular
Direct material costs $ 84 $ 54 $ 62
Direct manufacturing labor costs $ 14 $ 28 $ 8
Manufacturing overhead costs $ 42 $ 84 $ 24
Units produced 80 120 100

Required
1. Compute the manufacturing cost per unit for each product produced in July 2008.
2. 2. Suppose that in August 2008, production was 120 million units of Supreme, 160 million units of Deluxe, and 180 million units of Regular. Why might the July 2008 information on manufacturing cost per unit be misleading when predicting total manufacturing costs in August 2008?

2- 30 Computing cost of goods purchased and cost of goods sold. The following data are for Marvin Department Store. The account balances (in thousands) are for 2008.
Marketing, distribution, and customer- service costs $ 37,000
Merchandise inventory, January 1, 2008 27,000
Utilities 17,000 General and administrative costs 43,000
Merchandise inventory, December 31, 2008 34,000
Purchases 155,000
Miscellaneous costs 4,000
Transportation- in 7,000
Purchase returns and allowances 4,000
Purchase discounts 6,000

Required: Compute the cost of goods purchased and the cost of goods sold.

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