Question

Wendy Chen established Windy City Coaching (WCC) to provide teen counseling and executive coaching services to its clients. WCC charges a $300 fee per hour for each service. The revenues and costs for the year are shown in the following income statement:

WINDY CITY COACHING Income Statement
	Teen Counseling	Executive Coaching	Total
Revenue	$66,000	$135,000	$201,000
Expenses:
Administrative support			40,000
Transportation, etc.			36,000
Equipment			20,000
Profit			$105,000

WCC has kept good records of the following data for cost allocation purposes:

		Activity Level
Activity	Cost Driver	Teen Counseling	Executive Coaching
Providing administrative support	Number of clients	6	4
Traveling	Number of visits	100	150
Using equipment	Computer hours	900	700

Required

Complete the income statement using activity-based costing and WCC’s three cost drivers.

Recompute the income statement using direct labor-hours as the only allocation base (220 hours for teen counseling; 450 hours for executive coaching).

How might WCC’s decisions regarding pricing or dropping a service be altered if Wendy were to allocate all overhead costs using direct labor-hours?

Under what circumstances would the labor-based allocation and activity-based costing (using Wendy’s three cost drivers) result in similar profit results?

A local nonprofit charity is looking for worthy causes to support through financial grants. A primary criterion for support is financial need. Wendy is thinking of applying for support for the teen counseling program. Which allocation method would give her the best chance of winning a grant? Would it be ethical for Wendy to report the income using this method in her application?

Answer 1

INCOME STATEMENT
		Teen Counseling	Executive Coaching	Total
Revenue		$         66,000.00	$          135,000.00	$ 201,000.00
Expenses:
Administrative support	40000/10=4000	$             24,000.00	$                16,000.00	$    40,000.00
Transportation, etc.	36000/250=144	$             14,400.00	$                21,600.00	$    36,000.00
Equipment	20000/1600=12.5	$             11,250.00	$                  8,750.00	$    20,000.00
Profit		$             16,350.00	$                88,650.00	$ 105,000.00

Total Expenses	$                    96,000.00
(40,000+36,000+20,000)
No of labor hours	670
(450+220)
Expenses Per labor hour	$                          143.28

INCOME STATEMENT
	Teen Counseling	Executive Coaching	Total
Revenue	$            66,000.00	$           135,000.00	$ 201,000.00
Expenses	$                31,522.00	$                  64,478.00	$    96,000.00
Profit	$                34,478.00	$                  70,522.00	$ 105,000.00

3) Teen counseling and Executive Counseling both appears to be in Profit under Labor based Costing, So wendy will not emphaize one or other.

4)Here labor hours were distributed 32.84% to teen counselling and 67.16% to executive Counseling..So if wendy's three cost drivers are also distributed at 32.84 % to teen counseling and 67.16% to executive counseling then labor allocation and ABC wil be identical.

5)The ABC  allocation method would give her the best chance of winning a grant as it provides less profit in comparison to the traditional method so its support financial need.

Yes it would be ethical to report using ABC a it provides the more representative measure of the profits.