Patterson Lawn Co. wants to determine the cost of each lawn care maintenance job. The Company has two operating departments, one that performs lawn care services for commercial properties and one that services residential properties. Both operating departments are supported by two service departments, administrative and machine maintenance. Costs for each of these supporting departments are as follows: Administrative Machine Maintenance
Total cost $178,200 $441,000
The following estimates that are related to the operating departments is as follows:
Commercial Residential Total
properties properties
# of employees 42 24 66
# of customers 135 170 305
# of billable hours 5,000 4,000 9,000
Total overhead cost* $ 435,000 $ 360,000 $ 795,000
*Note that total overhead cost includes costs allocated from service departments and other overhead costs.
The Company uses the direct method for all cost allocations. Assume that total overhead cost is allocated based on the # of billable hours incurred by each operating department. Suppose a lawn care maintenance job in the residential properties department has a direct cost of $170 and takes 4 hours to complete. What is the total cost of this job?

Explanation:

                                        Administrative

                               Machine        Maintenance

Total cost              $178,200          $441,000

                                              Operating

                            Commercial       Residential          Total

# of employees           42                     24                   66

# of customers           135                    170                 305

# of billable hours    5,000              4,000              9,000

overhead cost*     $435,000        $360,000      $795,000

overhead cost

per billable hour         $87                  $90

Suppose a lawn care maintenance job in the residential properties department has a direct cost of $170 and takes 4 hours to complete. What is the total cost of this job?

total costs = $170 + (4 x $90) = $170 + $360 = $530

The direct method for cost allocations is a method that allocates overhead costs directly to the production department and the product itself.

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