Bonanza Enterprises provides consulting services and uses a job-order system to accumulate the cost of client projects. Traceable costs are charged directly to individual clients; in contrast, other costs incurred by Bonanza , but not identifiable with specific clients, are charged to jobs by using a predetermined overhead application rate. Clients are billed for directly chargeable costs, overhead, and a markup. Bonanza anticipates the following costs for the upcoming year:?CostPercentage of Cost Directly Traceable to ClientsProfessional staff salaries$5,000,000 80 %Administrative support staff600,00050 Travel200,00080Other Operating costs200,00020Total$6,000,000?Bonanza's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total cost
to achieve that figure.On May 14, Bonanza completed work on a project for Laramie Manufacturing. The following costs were incurred: professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other operating costs, $2,600.Required: A. Determine Bonanza's total traceable costs for the upcoming year and the firm's total anticipated overhead.B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs.C. What percentage of total cost will Bonanza add to each job to achieve its profit target?D. Determine the total cost of the Laramie Manufacturing project. How much would Laramie be billed for services performed?
What will be an ideal response?
A. Traceable costs total $4,500,000, computed as follows:
| ? | Total Cost | Percentage Traceable | Traceable Cost |
| Professional staff salaries | $5,000,000 | 80 % | $4,000,000 |
| Administrative support staff | 600,000 | 50 | 300,000 |
| Travel | 200,000 | 80 | 160,000 |
| Other Operating costs | 200,000 | 20 | 40,000 |
| Total | $6,000,000 | ? | $4,500,000 |
Bonanza's overhead (i.e., the nontraceable costs) totals $1,500,000 ($6,000,000 - $4,500,000).
B. Predetermined overhead rate: $1,500,000 ÷ $4,500,000 = 33.33%
C. Target profit percentage: $480,000 ÷ $6,000,000 = 8%
D. The total cost of the Laramie Manufacturing project is $120,000, and the billing is $129,600, as follows:
| Professional staff salaries | $68,000 |
| Administrative support staff | 8,900 |
| Travel | 10,500 |
| Other operating costs | 2,600 |
| Subtotal | $90,000 |
| Overhead ($90,000 × 33/33%) | 30,000 |
| Total cost | $120,000 |
| Markup ($120,000 × 8%) | 9,600 |
| Billing to Laramie Manufacturing | $129,600 |
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