Accounting Case

Report of Foster Appliance Repair Case

Group No. 3

Instructor: Dr. Talal Al-Hayale

Date: July 9, 2015

* Introduction

Foster Appliance Repair has provided repair services with a fair price for many years, run by Victor Foster and his wife Sally Jones. Recently, they are facing some problems that the profit has declined, the number of repair orders has also declined, and there are more competitors. The price is the key to attracting customers and to a large degree it is based on the cost of repairs. In order to understand why they generated less profit, they have to analyze the situation thoroughly.

* Information about the costing system

1. Direct materials used in repairs are charged directly to the job;

2. There is four repair personnel with fixed salary of $50000 per year and the two technicians with fixed salary of $38000 per years. All these six repair personnel works 1750 hours every year on customer jobs;

3. The other total indirect cost is $178450 per year.

4. The price for each job =Total Direct Material Cost + Shop Rate ×Repair Hours + 10% Markup

5. Total cost for each job = Total Direct Material Cost + Shop Rate × Repair Hours

6.Shop Rate=Total Personnel Salaries + Total Indirect CostTotal Hours

* The old shop rate

Based on above information, the shop rate Foster used to adopt is:

Shop Rate=Total Personnel Salaries + Total Indirect Cost (Overhead)Total Hours

=50,000×4+38,000×2+178,4501750×6 =$43.28/hour

* The new shop rate

Jones also found out that about 65% of total indirect costs (the overhead) related to complex repairs over the past few years, while the 35% of total indirect costs related to simpler repairs. Moreover, about 50% of the total repair hours of repair personnel was related to complex repairs, and the other 50% was related to the simple repairs.

According to the Jones’s information, we need to allocate the direct labor costs and total overhead by the complexity of the job, so we generate a...