Question

Adler ​& Company is an architectural firm specializing in home remodelling for private clients and new office buildings for corporate clients. Adler ​& Company charges customers at a billing rate equal to 127​% of the​ client's total job cost. A​ lient's total job cost is a combination of​ (1) professional time spent on the client ​($70 per hour cost of employing each​ professional) and​ (2) operating overhead allocated to the​ client's job. Adler allocates operating overhead to jobs based on professional hours spent on the job. Adler estimates its five professionals will incur a total of​ 10,000 professional hours working on client jobs during the year. ll operating costs other than professional salaries​ (travel reimbursements, copy​ costs, secretarial​ salaries, office​ lease, and so​ forth) can be assigned to the three activities. Total activity​ costs, cost​ drivers, and total usage of those cost drivers are estimated as​ follows:

	Total		Total Usage		Total Usage
	Activity		by Corporate		by Private
Activity	Cost	Cost Driver	Clients		Clients
Transporation to clients . . . . . .	$11,000	Round-trip
		mileage to clients . . .	4,500	kilometres	10,500	km
Blueprint copying . . . . . . . . . . .	42,000	Number of copies . . . . . .	400	copies	600	copies
Office support . . . . . . . . . . . . . .	199,000	Secretarial time . . . . . . .	2,200	secretarial	2,800	secretarial
				hours		hours
Total operating overhead . . . .	$252,000

Amy Lee hired Adler ​& Company to remodel her kitchen. A total of 33 professional hours were incurred on this job. In​ addition, Amy's remodelling job required one of the professionals to travel back and forth to her house for a total of 132 km. The blueprints had to be copied four times because Amy changed the plans several times. In​ addition, 19 hours of secretarial time were used lining up the subcontractors for the job.

1.	Calculate the current indirect cost allocation rate per professional hour.
2.	Calculate the amount that would be billed to Amy Lee given the current costing structure.
3.	Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs.
4.	Calculate the amount that would be billed to Amy Lee using ABC costing.
5.	Which type of billing system is fairer to​ clients? Explain.

Requirement 1. Calculate the current indirect cost allocation rate per professional hour. ​(Round your answer to the nearest​ cent.)

The current indirect cost allocation rate per professional hour is .....$ .

Requirement 2. Calculate the amount that would be billed to Amy Lee given the current costing structure.

Determine the​ formula, then calculate the amount that would be billed to Amy Lee given the current costing structure. ​(Round all calculations to the nearest​ cent.)

x

=

Amount billed to client

x

=

Requirement 3. Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs.

Determine the​ formula, then calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs. ​(Round your final answers to the nearest​ cent.)

/

=

Activity allocation rate

Transportation to clients		/			=		/ km
Blueprint copying		/			=		/ copy
Office support		/			=		/ secretarial hour

Requirement 4. Calculate the amount that would be billed to Amy Lee using ABC costing.

Determine the​ formula, then calculate the amount that would be billed to Amy Lee using ABC costing. ​(Round all calculations to the nearest​ cent.)

x

=

Amount billed to client

x

=

Requirement 5. Which type of billing system is fairer to​ clients? Explain.

The

▼

ABC

traditional

billing system should be fairer to clients because they are charged according to

▼

the direct labour hours on the job

the resources they used

the total hours on the job

.

For​ example, copying blueprints is

▼

not expensive

very expensive

. Under the fairer​ system, clients are charged

▼

a set one time fee for

according to the number of

blueprint copies that their job required. The fairer system better recognized the extent to which

▼

operating

receiving

selling

costs are incurred by each unique client job.

Answer 1

1	Indirect cost allocation rate = Total operating overhead ÷ Total professional hours
			$252,000 ÷ 10,000
			$25.20	per professional hour
2	Professional Fees	33 hrs x $70 = $2,310
	Overhead assigned	33 hrs x $25.20 = $831.60
	Total Cost	$3,141.60
	x 127%	x 127%
	Amount billed to client	$                                       3,989.83
3	Activity Allocation rates:
		A						B	C = A/B
		Total		Total Usage		Total Usage		Total	Activity Rate
		Activity		by Corporate		by Private		Activity
	Activity	Cost	Cost Driver	Clients		Clients		Usage
	Transporation to clients	$11,000	Round-trip mileage to clients	4,500	Kms	10,500	Kms	15,000	0.73	Per KM
	Blueprint copying	42,000	Number of copies	400	copies	600	copies	1,000	42	Per Copy
	Office support	199,000	Secretarial time	2,200	secretarial hrs	2,800	secretarial hrs	5,000	39.80	Per Sec. Hr
	Total operating overhead	$252,000
4	Professional Fees	33 hrs x $70 = $2,310
	Overhead assigned:
	Transporation to clients	132 KM x $0.73 = $96.36
	Blueprint copying	4 copy x $42 = $168
	Office support	19 Sec. hrs x $39.80 = $756.20
	Total Cost	$3,330.56
	x 127%	x 127%
	Amount billed to client	$                                       4,229.81
5	The ABC billing system should be fairer to clients because they are charged according to the resources they used For example, copying blueprints is very expensive Under the fairer system, clients are charged according to the number of blueprint copies that their job required. The fairer system better recognized the extent to which operating costs are incurred by each unique client job.