Question

CALCULATIONS FOR SCHEDULE 3: 2019 Budgeted Overhead Calculations	?	?	?	?	?	?	?	?	?	?
?	Add column names as appropriate	?	?	?	?	?	?	?	?	?
EXISTING OVERHEAD ALLOCATION:	?	?	?	Tax	Bookkeeping	Advisory	?	?	?	?
?	?	?	?	?	?	?	?	?	?	?
?	?	?	?	?	?	?	?	?	?	?
?	?	?	?	?	?	?	?	?	?	?
?	?	?	?	?	?	?	?	?	?	?
?	?	?	?	?	?	?	?	?	?	?
ACTIVITY BASED COSTING ALLOCATION OF OVERHEAD COSTS	?	?	?	?	Activity by service			Cost per service
Activity	Cost	Cost driver	Total cost driver	Cost per cost driver	Tax	Bookkeeping	Advisory	Tax	Bookkeeping	Advisory
facility related	$96,000	floor space	380	$252.63	130	55	195	$32,842.11	$13,894.74	$49,263.16
technical support	$24,000	# of IT request	136	$176.47	46	15	75	$8,117.65	$2,647.06	$13,235.29
adminstrative	$160,000	billiable hours	14136	$11.32	5,600	1,830	6,700	$63,384.27	$20,713.07	$75,834.75
client travel	$82,000	km's travelled	2320	$35.34	330	80	1,910	$11,663.79	$2,827.59	$67,508.62
advertising	$48,000	# clients	200	$240.00	73	19	108	$17,520.00	$4,560.00	$25,920.00
?	?	?	?	?	?	?	Total	$133,527.81	$44,642.45	$231,761.82
Total overhead	$410,000	?	?	?	?	?	?	?	?	?
Total Billable hours	14,130	?	?	?	?	?	?	?	?	?
OH rate=	$29.02	?	?	?	?	?	?	?	?	?
OH COST ADVISORY	$194,409.06	?	?	?	?	?	?	?	?	?
OH Cost Bookkeeping	$53,099.79	?	?	?	?	?	?	?	?	?
OH Cost Tax	$162,491.15	?	?	?	?	?	?	?	?	?

SCHEDULE 4:	Prepare a comparison of overhead allocation :
?	?	?	?
Existing OH Allocation	?	ABC Allocation	?
OH Rate:	?	OH Rates:	?
Per Billable hour	?	Per Activity	?
	$29.02	Facility related	$252.63
?	?	Technical Support	$176.47
?	?	Administrative	$11.32
?	?	Client Travel	$35.34
?	?	Advertising	$240.00
OH costs by service (total $)	?	OH costs by service (total $)	?
Tax	?	Tax	$133,527.81
Bookkeeping	?	Bookkeeping	$44,642.45
Advisory	194,409.09	Advisory	$231,762

question

please analyze that comparison of the overhead allocation to each service unit under both methods, traditional and Activity-Based Costing (ABC), which method is better for this company??

Answer 1

ans

Activity based costing identifies different cost pool and activities associated with it and allocates cost on this basis, so this gives accurate allocation of cost to products and increases the traceability of the cost to the product or services. In other words ABC costing assigns factory/manufacturing overhead based on the activities identified and assigning cost to those activities according to the actual consumption by each activity. If cost is wrongly traced the product or services can be under priced or over priced which can affect the sales volume and customers. Hence there can be loss of customers in case of over price and loss of revenue in case of under price. So when proper cost is assigned to each activity than we are able to know which cost is in control and which cost is going out of control. So those cost which are increasing we could fix up the responsibility to those handling that and we could take steps to control the cost.

whereas Traditional method of allocation of manufacturing overhead based on predetermined overhead rate so it does not give correct allocation of overhead as ABC costing gives

The question you have asked of for analysing
	Traditional Method	ABC
Overhead cost allocated
Advisory	$194,409	$231,762
Bookkeeping	53100	44642
Tax	162491	133528
It is better to use ABC as cost allocated to advisory is less in traditional method so the cost is undervalued
which results in increase in ptrofit for Advisory services which is not the real case
Bookeeping services overhead cost is allocated more in traditional method so cost is overvalued which results in decraese in profits
Tax services overhead cost is allocated more in traditional method so cost is overvalued which results in decrease in profits but that is not true
Hence it is better to use ABC so that correct cost can be computed for the sevices