Question

A&R Quality Advisors is a small consulting firm offering quality audits and advising services to small and mid-sized manufacturing firms. Quality audits entail reviewing, checking, and documenting quality practices within a firm. Quality advising entails making recommendations for new or revised quality practices. Other firms in the area offer one or both of these services, although the competition for quality audit jobs is stronger than for quality advising. In addition to senior executives, A&R employees are either staff or managers. Staff employees are usually younger with less experience. Managers, who oversee the staff on jobs, are more experienced. The average hourly wage is $230 for staff and $575 for managers. (Both staff and managers are paid an annual salary, these hourly costs are based on 2,000 average annual hours worked.) Staff are expected to spend at least 90 percent of their time on billable work. Because of administrative work associated with supervising the staff and the expectation that managers will spend a portion of their time seeking new business, managers are expected to spend about 50 percent of their time on billable work. A&R employs ten staff and two managers. In addition to staff and manager costs, A&R has overhead and administrative costs of $8,308,000, of which about $2,769,000 is variable with respect to billable hours. Overhead and administrative costs include the non-billable cost of the staff and managers. Selected information on billable hours expected for the next year follow.

Answer 1

a. Predetermined overhead rate = Expected Overhead / Expected Billable Hours = $ 8,308,000 / 20,000 billable hours = $ 415.40

b. Client 02 will be billed $ 154,660.

	Staff	Manager
Billable hours	308	44
Billable rate	370	925
Total	$ 113,960	$ 40,700

c. Cost of Client 02 auditing services: $ 144,874.40

Variable overhead rate per billable hour = $ 2,769,000 / 20,000 billable hours = $ 138.45

Costs: Staff ( 308 x $ 230)	$ 70,840
Costs: Manager ( 44 x $ 575 )	25,300
Variable Overhead ( 352 x $ 138.45)	48,734.40
Total cost assigned to Client 02	$ 144,874.40