Question

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1. Mike K. provides consulting and tax preparation services to clients. Mike charges a fee of $100 per hour for each service and can devote a maximum of 4,000 hours annually to his clients. He reported the following revenues and expenses for 2014: $400,000 Revenue Expenses (all overhead): Secretarial support Supplies Computer costs Net income $84,000 72,000 48.000 $196,000 Being an accountant, Mike kept good records of the following data for 2014: Revenues Direct labour hours Tax Preparation $ 130,000 1.300 Consulting $270,000 2.700 a. Mike is trying to determine the profitability of each of the services he provides so he can better allocate his time. Determine the profit per labour hour of each service if Mike were to allocate all the overhead costs using direct-labours as the only overhead cost driver. b. Mike collected the following additional information: Tax Overhead cost Secretarial support Supplies Computer costs Cost driver Number of clients Transactions with clients Computer hours Activity Level Consulting 48 300 600 Total 120 500 1.600 200 1,000 Determine the profit per labour hour of each service if Mike were to allocate all the overhead costs using activity-based costing and the three cost drivers above, i.e., number of clients, number of transactions with clients, and computer hours.

Answer 1

Mike K. provided service-wise revenue and direct labour hour and details of expenses on a consolidated basis. Here the expenses will be allocated in the Direct Labour Hour Rate as given, and accordingly after computation of the profit, we have to divide the service-wise profit by the Direct labour hours to get the profit per labour hour.

5hluton (a) Mive K. prowides toreat aud ar baraom Services te hio Chiaulo Acu becendafurmiched, Tax Preparaton Covoul Pryk Total L20,000 4,00,000 4,000 970000 Directlaboun thw A/s00 Fo Gutberting o fr it in ea di avices, Mike decidad to alstode luE Expurneo in Dreot Lakau ttorn fali Theralore, Dhect Laboux Howr Ratifor Toxfrepaation 19 Cerutong 32.5% too 4000 ST.5Y 4000 So, Let vo &ecli poofit peo lakeuo hour, orhapanaten Revenutes (#) 1,90000 20,000 Leg:Exbenoeo (4) -Secrelarial Suppost (56700) [84,000x65 Sappics 98,400) 000 x398 (16,600) [4RD00 39.5 (4.&.6 00) [9,000X757 (32, 400) 48,0K 67.5 Net Rewerne Pangit(4) 3,82.800 68,700 9100 300 Dhect labous hour 49 49 frefit pos Laboers hour (4) Thenefore, thofit beo labem heee tn balti vie io 49.00pes heur