Adler ?& Company is an architectural firm specializing inhome remodelling for private clients and new office buildings forcorporate clients. Adler ?& Company charges customers at abilling rate equal to 127?% of the? client's total job cost. A?lient's total job cost is a combination of? (1) professional timespent 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 onprofessional hours spent on the job. Adler estimates its fiveprofessionals will incur a total of? 10,000 professional hoursworking on client jobs during the year. ll operating costs other than professional salaries? (travelreimbursements, copy? costs, secretarial? salaries, office? lease,and so? forth) can be assigned to the three activities. Totalactivity? costs, cost? drivers, and total usage of those costdrivers 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 . . . . | $252,000 | | | |
Amy Lee hired Adler ?& Company to remodel her kitchen. Atotal of 33 professional hours were incurred on this job. In?addition, Amy's remodelling job required one of the professionalsto travel back and forth to her house for a total of 132 km. Theblueprints had to be copied four times because Amy changed theplans several times. In? addition, 19 hours of secretarial timewere used lining up the subcontractors for the job.
1. | Calculate the current indirect cost allocation rate perprofessional hour. |
2. | Calculate the amount that would be billed to Amy Lee given thecurrent costing structure. |
3. | Calculate the activity cost allocation rates that could be usedto allocate operating overhead costs to client jobs. |
4. | Calculate the amount that would be billed to Amy Lee using ABCcosting. |
5. | Which type of billing system is fairer to? clients? Explain. |
Requirement 1. Calculate the current indirect cost allocationrate per professional hour. ?(Round your answer to the nearest?cent.)
The current indirect cost allocation rate per professional houris .....$ .
Requirement 2. Calculate the amount that would be billed to AmyLee given the current costing structure.
Determine the? formula, then calculate the amount that would bebilled to Amy Lee given the current costing structure. ?(Round allcalculations to the nearest? cent.)
| | x | | = | Amount billed to client |
Requirement 3. Calculate the activity cost allocation rates thatcould be used to allocate operating overhead costs to clientjobs.
Determine the? formula, then calculate the activity costallocation rates that could be used to allocate operating overheadcosts 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 AmyLee using ABC costing.
Determine the? formula, then calculate the amount that would bebilled to Amy Lee using ABC costing. ?(Round all calculations tothe nearest? cent.)
| | x | | = | Amount billed to client |
Requirement 5. Which type of billing system is fairer to?clients? Explain.
The
?
ABC
traditional
billing system should be fairer to clients because they arecharged 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 systembetter recognized the extent to which
?
operating
receiving
selling
costs are incurred by each unique client job.
