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UOT Printing provides printing services to many different corporate clients

Accounting

UOT Printing provides printing services to many different corporate clients. UOT bids on print jobs, however the new ones, are negotiated on a cost-plus basis. Cost-plus means that the buyer is willing to pay the actual cost plus a return (pro?t) on product costs to UOT. (Cost-plus means if the total Job cost were $5 .00 at 30% cost-plus, the selling price would be $6.50 with $1.50 as pro?ts to UOT) Alissa Shah, controller for UOT, has recently returned from a meeting where UOT's president stated that he wanted her to ?nd a way to charge most of the company?s costs to projects that are on a cost-plus basis. The president noted that the company needed more pro?ts to meet its stated goals this period. By charging more costs to the cost-plus projects and therefore fewer costs to the recurring set price jobs, the company should be able to increase its pro?ts for the current year. Alissa knew why the president wanted to take this action. Rumours were that he was looking for a new job with another company and, if the company reported strong pro?ts, the president's opportunities would be better for his new position. Alissa also recognized that she could probably increase the cost of certain jobs by changing the activity basis used to allocate the manufacturing overhead. The current cost base used to allocate manufacturing overhead was using direct labour hours. UOT current revenue streams are made up of 75% new bids and 25% recurring contract jobs with set pricing. This is based on 500 jobs completed in the year. Using the cost information in Exhibit 1 answer the following question. 1) What allocation base could Alissa use to achieve the president’s request? (Hint: calculate the predetemiined overhead rates for the current allocation and your purposed allocation(s) using the different activity base. Include of possible options before deciding) 2) Quantify the difference between using direct labour hours to allocate manufacturing overhead and your selected allocation base in question 1) per job on average. 3) Does this affect the overall cost for UOT -Explain? How much would total revenue increase based on the purposed changes? 4) Discuss the ethical implications. Ifyou were Alissa what would you do?

Exhibit #1 (Based on 500 jobs in the year) Average Cost rate Direct Labour Design team SSS/hour Layout $75/hour Printing labour $25/hour Direct Material Paper costs $10] LB Other annual cost for the year Executive Sales and Admin Salaries $400,000 Factory Janitorial and security wages $90,000 Ink Supplies $340,000 Factory Utilities and supplies $50,000 Shipping Costs $10,000 Website Costs $8,000 Printing Equipment Depreciation $9,000 Factory Supervisor $85,000 Factory Insurance costs $15,000 $1,007,000 Average hours Per New Bid Job 800 Lbs 18 50 Average hours Per Contract Job 1200 Lbs 90 Annual Total All Jobs 7,375 2,750 30,000 40, 125 450,000 Hours Hours Hours Hours LBS

Input and Calculation Annual Average cost rate New vbid Contract Job total DL Design 95/hr 18 5 7375 Layout 75/hr 6 4 2750 Printing 25/hr 50 90 30000 74 99 40125 Total OH 1007000 Rate 25.10 OH of per New bid 1857 OH of per Contract 2485 If we propose the Layout hours as the basis Total OH 1007000 Total hours of layout 2750 Rate 366.18 New bid 2197 Contract bid 1465 Note: Since the OH cost of new bid under acticity base is greater the DL allocation base (2197>1857), therefore Alissa can use this basis to satisfy president's request

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