4. Calculate the amount that would be billed to Li using ABC costing. 5. Which type of billing system is more fair to clients? Explain.
4. Calculate the amount that would be billed to Li using ABC costing. 5. Which type of billing system is more fair to clients? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Please answer parts 4 and 5.
Transcribed Image Text:FA-22A Using ABC to bill clients at a service firm (Learning Objective 2)
Kushner & Company is an architectural firm specializing in home remodeling for private
clients and new office buildings for corporate clients.
Kushner charges customers at a billing rate equal to 130% 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. Kushner allocates operating overhead to jobs based on professional
hours spent on the job. Kushner 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
by Corporate
Clients
Total Usage
by Private
Clients
Activity
Activity
Transportation to clients
Blueprint copying.
Cost
Cost Driver
24
6,000 Round-trip mileage to clients
4,500 miles
10,500 miles
32,000 Number of copies
250 copies
750 copies
Office
195.000 Secretarial time
2,500 secretarial 2,500 secretarial
hours
support
hours
Total operating overhead
$ 233.000
Yimeng Li hired Kushner to design her kitchen remodeling. A total of 25 professional
ours were incurred on this job. In addition, Li's remodeling job required one of the pro-
ssionals to travel back and forth to her house for a total of 125 miles. The blueprints
15 to be copied four times because Li changed the plans several times. In addition,
15 hours of secretarial time were used lining up the subcontractors for the job.
Transcribed Image Text:Requirements
1. Calculate the current indirect cost allocation rate per professional hour.
2. Calculate the total amount that would be billed to Li 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 Li using ABC costing.
5. Which type of billing system is more fair to clients? Explain.
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