Question

Adler ​& Company is an architectural firm specializing in home remodeling for private clients and new office buildings for corporate clients.

Adler charges customers at a billing rate equal to 132​% of the​client's total job cost. A​ client's total job cost is a combination of​ (1) professional time spent on the client

​($63 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.

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. . . . . .	$9,000	Round-trip mileage to clients. . . . .	3,000	miles	12,000	miles
Blueprint copying. . . . . . . . . . .	37,000	Number of copies. . . . . . . . . . . . . .	400	copies	600	copies
Office support. . . . . . . . . . . . . .	215,000	Secretarial time. . . . . . . . . . . . .	2,700	secretarial	2,300	secretarial
				hours		hours
Total operating overhead. . . . .	$261,000

Adler estimates its five professionals will incur a total of​10,000 professional hours working on client jobs during the year.

Ann Law hired Adler to design her kitchen remodeling. A total of 35 professional hours were incurred on this job. In​ addition, Law​'s

remodeling job required one of the professionals to travel back and forth to her house for a total of 150 miles. The blueprints had to be copied four times because

Law changed the plans several times. In​ addition,18 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 total amount that would be billed to Law 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 Law using ABC costing.
5.	Which type of billing system is more fair to​ clients? Explain.

Answer 1

Part 1

Current Ohd allocation rate = 261000/10000=$26.1/hrs

Part 2

Billed to Law based on current costing structure

Professional fees(35hrs*63). 2205

Ohd cost (35*26.1). 913.5

Total job cost. 3118.5

Bill Amt ( 3118.5+132%). 7234.92

Part 3

Transport cost. 9000/(3000+12000) =$0.6 per miles

Blueprint copies. 37000/(600+400)=$37 per copies

Office support. 215000/(2700+2300)= $43 per secretarial hours

Part 4

Professional fees 2205

Transport cost (150*0.6). 90

Blueprint. (4*37). 148

Office support (18*43). 774

Total job cost. 3217

Bill amt (3217+132%). 7463.44

Part 5

ABC system is more fair billing system as it allocates overhead of each activity based on respective cost driver instead of allocating all Ohd based on hours.