Question

The Wolfson Group​ (WG) provides tax advice to multinational firms. WG charges clients for​ (a) direct professional time​ (at an hourly​ rate) and​ (b) support services​ (at 30% of the direct professional costs​ billed). The three professionals in WG and their rates per professional hour are as​ follows:

Professional

Billing Rate per Hour

Matthew Wolfson 500

Ashley Bryant 130

Jack Anderson 60

WG has just prepared the May 2017 bills for two clients. The hours of professional time spent on each client are as​ follows:

	Hours per Client
Professional	Seattle Dominion	Ackerman Enterprises
Wolfson	11	2
Bryant	2	6
Anderson	17	22
Total	30	30

1.	What amounts did WG bill to Seattle Dominion and Ackerman Enterprises for May 2017​?
2.	Suppose support services were billed at $40 per professional​ labor-hour (instead of​ 30% of professional labor​ costs). How would this change affect the amounts WG billed to the two clients for May 2017​? Comment on the differences between the amounts billed in requirements 1 and 2.
3.	How would you determine whether professional labor costs or professional​ labor-hours is the more appropriate allocation base for​ WG's support​ services?

Answer 1

1. Calculation of the amount of bill to be charged by WG to Seattle Dominion and Ackerman Enterprises for May 2017​:

Given information

WG charges clients for​ (a) direct professional time​ (at an hourly​ rate) and​ (b) support services​ (at 30% of the direct professional costs​ billed).

The three professionals in WG and their rates per professional hour are as​ follows:

Professional	Billing Rate per Hour
Matthew Wolfson	$500
Ashley Bryant	$130
Jack Anderson	$60

The hours of professional time spent on each client are as​ follows:

	Hours per Client
Professional	Seattle Dominion	Ackerman Enterprises
Matthew Wolfson	11	2
Ashley Bryant	2	6
Jack Anderson	17	22
Total	30 hours	30 hours

The amount to be charged by WG will be as follows:

Professional	Seattle Dominion	Ackerman Enterprises
Direct Professional Cost:
Matthew Wolfson	$5,500 (11 Hrs. @ $500)	$1,000 (2 Hrs. @ $500)
Ashley Bryant	$260 (2 Hrs. @ $130)	$780 (6 Hrs. @ $130)
Jack Anderson	$1,020 (17 Hrs. @ $60)	$1,320 (22 Hrs. @ $60)
Total direct professional cost	$6,780	$3,100
Support services:
Matthew Wolfson	$1,650 ($5,500 x 30%)	$300 ($1,000 x 30%)
Ashley Bryant	$78 ($260 x 30%)	$234 ($780 x 30%)
Jack Anderson	$306 ($1,020 x 30%)	$396 ($1,320 x 30%)
Total support service cost	$2,034	$930
Total costs	$8,814 ($6,780 + $2,034)	$4,030 ($3,100 + $930)

2. Calculation of the amount of bill to be charged by WG to Seattle Dominion and Ackerman Enterprises for May 2017​ if the support services are billed at $40 per professional labor hour:

Professional	Seattle Dominion	Ackerman Enterprises
Direct Professional Cost:
Matthew Wolfson	$5,500 (11 Hrs. @ $500)	$1,000 (2 Hrs. @ $500)
Ashley Bryant	$260 (2 Hrs. @ $130)	$780 (6 Hrs. @ $130)
Jack Anderson	$1,020 (17 Hrs. @ $60)	$1,320 (22 Hrs. @ $60)
Total direct professional cost	$6,780	$3,100
Support services:
Matthew Wolfson	$440 (11 Hrs. @ $40)	$80 (2 Hrs. @ $40)
Ashley Bryant	80 (2 Hrs. @ $40)	240 (6 Hrs. @ $40)
Jack Anderson	680 (17 Hrs. @ $40)	880 (22 Hrs. @ $40)
Total support service cost	$1,200	$1,200
Total costs	7,980 ($6,780 + $1,200)	$4,300 ($3,100 + $1,200)

Differences between the amounts billed in (1) and (2): In (1) above the amount of support services cost is more under Option 1 when compared to Option 2. Similarly the amount of support sevices cost is more under Option 2 when compared with Option 1. This is because, under Option 1 the support services costs are determined as 30% of direct professional costs and $40 per professional hour under Option 2.

3. Determination of more appropriate allocation base for​ WG's support​ services:

Under Option 2 the support services are allocated on the basis of direct professional hours which will be more accurate beacause it will be billed only when the professional has worked on the client, but under Option 1 it will be charged at a flat rate of 30% of direct professional cost which will be inefficient type of charging the cost.

Therefore, the support services are allocated on the basis of direct professional hours.