Chapter 9, Problem 41E

a.

To determine

Compute the income statement using activity-based costing and WCC’s three cost drivers.

Explanation of Solution

Activity-based costing:

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.

Compute the rate per overhead:

Particulars	Rate
Administrative support	$   4,000.00
Transportation	$      144.00
Equipment	$        12.50

Table: (1)

Compute the income statement using activity-based costing and WCC’s three cost drivers:

Particulars	Teen counseling	Executive coaching	Total
Revenue	$66,000.00	$135,000.00	$201,000.00
Overhead:
Administrative support $\left(\begin{array}{l}Number\text{ of clients}\\ \times \text{ Rate per client}\end{array}\right)$	$24,000.00	$16,000.00	$40,000.00
Add: Transportation $\left(\begin{array}{l}\text{Number of visits}\\ \times \text{ Rate per visit}\end{array}\right)$	$14,400.00	$21,600.00	$36,000.00
Add: Equipment $\left(\begin{array}{l}\text{Number of hours}\\ \times \text{ Rate per hour}\end{array}\right)$	$11,250.00	$8,750.00	$20,000.00
Total overhead	$49,650.00	$46,350.00	$96,000.00
Profit $\left(\text{Revenue }-\text{ Total overhead}\right)$	$16,350.00	$88,650.00	$105,000.00

Table: (2)

Thus, the profit of teen counseling and executive coachings are $16,350 and $88,650 respectively.

b.

To determine

Recompute the income statement according to the information given in the question.

Explanation of Solution

Activity-based costing:

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.

Compute the income statement according to the information given in the question:

Particulars	Teen counseling	Executive coaching	Total
Revenue	$66,000.00	$135,000.00	$201,000.00
Expenses $\left(\begin{array}{l}Number\text{ of hours}\\ \times \text{ Rate per hour }\left(1\right)\end{array}\right)$	$31,522.39	$64,477.61	$96,000.00
Profit $\left(\begin{array}{l}\mathrm{Re}venue\\ -\text{ Expenses}\end{array}\right)$	$34,477.61	$70,522.39	$105,000.00

Table: (3)

Working note 1:

Compute the rate per hour for expenses:

$\begin{array}{c}Rate\text{ per hour = }\frac{\text{Total expenses}}{\text{Number of hours (2)}}\\ =\frac{\$96,000}{670}\\ =\text{ 143}\text{.28}\end{array}$

Working note 2:

Compute the number of hours:

$\begin{array}{c}Number\text{ of hours = }\frac{\mathrm{Re}venue}{\text{Rate per hour}}\\ =\frac{\$201,000}{\$300}\\ =670\end{array}$

c.

To determine

Determine the impact of the decision taken regarding the situation given in the question.

Explanation of Solution

Situation given in the question:

Decisions regarding pricing or dropping a service be altered if all the overhead costs were allocated using direct labor-hours.

Impact of the decision being advised in the question:

Teen counseling and executive coaching are equally profitable when using labor-based costing system. Hence, the decision would be to not drop either of the services as the profit is almost equal when using labor-based costing system.

d.

To determine

Determine the circumstances where labor-based allocation and activity-based costing would result in similar profit.

Explanation of Solution

Circumstances where labor-based allocation and activity-based costing would result in similar profit:

If there are comparable product-line profits with respect to the smaller portion of costs of overhead or the cost drivers are correlated close to 1 in accordance with volume-related allocation base the labor-based allocation, and activity-based costing would result in similar profit.

e.

To determine

Determine whether or not it would be ethical for W to report the income using the method given in the question and which allocation method would give them the best chance of winning a grant.

Explanation of Solution

The implication of using ABC (activity-based costing) system:

ABC system is assigning higher costs to the services of teen counseling as compared to the traditional method is implementing.

The ethical dilemma of using the favorable costing system:

The dilemma of using the favorable costing system arises as there is no confirmation regarding the choice of ABC method for costing is solely to make the situation favorable. If there is no reason other than using the ABC method to make the outcome favorable then using ABC would be unethical.