Question

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

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.

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