Chapter 4, Problem 4.22AE

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:

Yimeng Li hired Kushner to design her kitchen remodeling. A total of 25 professional hours were incurred on this job. In addition, Li’s remodeling job required one of the professionals to travel back and forth to her house for a total of 125 miles. The blueprints had 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.

Requirements

1. 1. Calculate the current indirect cost allocation rate per professional hour.
2. 2. Calculate the total amount that would be billed to Li given the current costing structure.
3. 3. Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs.
4. 4. Calculate the amount that would be billed to Li using ABC costing.
5. 5. Which type of billing system is more fair to clients? Explain.