Department costing, service company. DLN is an architectural firm that designs and builds buildings. It prices each job on a cost plus 20% basis. Overhead costs in 2017 are $8,100,000. DLN’s simple costing system allocates overhead costs to its jobs based on number of jobs. There were three jobs in 2017. One customer, Chandler, has complained that the cost and price of its building in Chicago was not competitive. As a result, the controller has initiated a detailed review of the overhead allocation to determine if overhead costs should be charged to jobs in proportion to consumption of overhead resources by jobs. She gathers the following information:

1. Compute the overhead allocated to each project in 2017 using the simple costing system that allocates overhead costs to jobs based on the number of jobs.

2. Compute the overhead allocated to each project in 2017 using department overhead cost rates.

3. Do you think Chandler had a valid reason for dissatisfaction with the cost and price of its building? How does the allocation based on department rates change costs for each project?

4. What value, if any, would DLN get by allocating costs of each department based on the activities done in that department?

 

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