Acct 242Project 1Arizona Drilling Company (ADC) specializes in geothermal systems and

water

wells. In geothermal construction cementing is the process used to make sure

that a well is firmly protected.

The current costing system is a traditional costing system to account for

each of the individual wells. Specifically,

(1) The direct material is mainly composed of the pipe (both rigid and

flexible) and connective components. The direct material cost is

charged to the individual jobs. (2) The direct labor is the cost of all labor used on each job (both

supervisory and hourly drillers), including the salary, bonus, fringe

benefits, and any overtime premium. (3) The overhead cost is recorded under the following accounts: fuel cost,

rigging-related cost and the cost of mud and concrete to set the wells

and geothermal units. Overhead is charged to jobs on the basis of the

actual depth of each well. The rate is currently $5.50 per linear foot

drilled. (4) The monthly actual overhead costs are recorded to the appropriate

overhead accounts (Fuel, Mud and Rigging Supplies). ADC’s overhead cost c o m p r i s e s about 60% of the total cost. Under the

current costing system, overhead cost is primarily allocated to the individual

wells based on the actual well depth. As a result, the current overhead

allocation method is over-simplified. In the last several years, over-allocated

overhead has been substantial. As a result, Sandy Spudder, the owner (known

fondly as “Spud”), is concerned about the overhead allocation method and believes

ADC may be losing jobs to competitors. Therefore, Spud decided to investigate

improving the accuracy of the current costing system by engaging your team of

consultants.

There are five possible cost drivers that may be associated with changes in

overhead costs. These cost drivers include the number of wells, the total

distance driven for the job, the weight of the materials pipe, mud and

supplies, the total drilling depth, and the ton-miles.

(40 months of overhead and driver use are attached)

Your team is required to prepare an assessment of single pool/single driver

allocation now used and any recommendations for future overhead cost

allocations. OverheadAccounts

 

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