Question

Monson& Company is an architectural firm specializing in home remodeling for private clients and new office buildings for corporate clients. Monson charges customers at a billing rate equal to 128​%

of the​ client's total job cost. A​ client's total job cost is a combination of​(1) professional time spent on the client $64 per hour cost of employing each​ professional) and​ (2) operating overhead allocated to the​ client's job. Monson allocates operating overhead to jobs based on professional hours spent on the job. Monson estimates its five professionals will incur a total of​ 10,000 professional hours working on client jobs during the year.

All 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. . . . .	$6,000	Round-trip mileage to clients. .	2,000	miles	13,000	miles
Blueprint copying. . . . . . . .	34,000	Number of copies. . . . . . . . . . . . .	350	copies	650	copies
Office support. . . . . . . . . . . . . .	180,000	Secretarial time. . . . . . . . . . .	2,400	secretarial	2,600	secretarial
				hours		hours
Total operating overhead. .	$220,000

AnnikaLaughlin hired Monson to design her kitchen remodeling. A total of 2020 professional hours were incurred on this job. In​ addition, Laughlin​'s remodeling job required one of the professionals to travel back and forth to her house for a total of 160 miles. The blueprints had to be copied four times because Laughlin changed the plans several times. In​ addition, 19 hours of secretarial time were used lining up the subcontractors for the job.

Requirements

1.	Calculate the current indirect cost allocation rate per professional hour.
2.	Calculate the total amount that would be billed to Laughlin 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 Laughlin using ABC costing.
5.	Which type of billing system is more fair to​ clients? Explain.

Answer 1

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Part 1
Current indirect cost allocation rate per professional hour
Estimated Professional Hours	A	10000 Hours
Estimated Indirect Cost	B	$                                     220,000
Current indirect cost allocation rate per professional hour	B/A	$                                              22	Per professional Hour
Part 2
Professional Time	2020 Hours*$64	$                                     129,280
Operating Overhead	2020 Hours*$22	$                                       44,440
Total Cost of Job		$                                     173,720
Mark up		128%
Bill to Client		$                                     222,362
Part 3
Activity	Cost	Cost Driver	Corporate	Private	Total	Activity Rate
	A		B	C	D=B+C	A/D
Transporation to clients	$                6,000	Round-trip mileage to clients. .	2,000	13,000	15,000	$            0.40
Blueprint copying	$              34,000	Number of copies. . . . . . . . . . . . .	350	650	1,000	$          34.00
Office support	$            180,000	Secretarial time. . . . . . . . . . .	2,400	2,600	5,000	$          36.00
Total operating overhead. .	$            220,000
Part 4
Professional Time	2020 Hours*$64	$                                     129,280
Operating Overhead:
Transporation to clients	160 Miles*$0.40	$                                              64
Blueprint copying	4 Copies*$34	$                                            136
Office support	19 Hours*$36	$                                            684
Total Cost of Job		$                                     130,164
Mark up		128%
Bill to Client		$                                     166,610
Part 5
ABC Systems seems more fair to client
because they are charged according to the resources they used