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Arizona Drilling Company (ADC) specializes in geothermal systems and waterwells. In geothermal construction cementing is the process used to make surethat a well is firmly protected

Arizona Drilling Company (ADC) specializes in geothermal systems and waterwells. In geothermal construction cementing is the process used to make surethat a well is firmly protected.The current costing system is a traditional costing system to account foreach of the individual wells. Specifically,(1)The direct material is mainly composed of the pipe (both rigid andflexible) and connective components. The direct material cost ischarged to the individual jobs.(2)The direct labor is the cost of all labor used on each job (bothsupervisory and hourly drillers), including the salary, bonus, fringebenefits, 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 wellsand geothermal units.Overhead is charged to jobs on the basis of theactual depth of each well.The rate is currently $5.50 per linear footdrilled.(4)The monthly actual overhead costs are recorded to the appropriateoverhead accounts (Fuel, Mud and Rigging Supplies).ADC’s overhead cost comprises about 60% of the total cost. Under thecurrent costing system, overhead cost is primarily allocated to the individualwells based on the actual well depth. As a result, the current overheadallocation method is over-simplified. In the last several years, over-allocatedoverhead has been substantial.As a result, Sandy Spudder, the owner (knownfondly as “Spud”), is concerned about the overhead allocation method and believesADC may be losing jobs to competitors. Therefore, Spud decided to investigateimproving the accuracy of the current costing system by engaging your team ofconsultants.There are five possible cost drivers that may be associated with changes inoverhead costs. These cost drivers include the number of wells, the totaldistance driven for the job, the weight of the materials pipe, mud andsupplies, 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 driverallocation now used and any recommendations for future overhead costallocations.

 
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