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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