Question

Davis & Company is an architectural firm specializing in home remodeling for private clients and new office buildings for corporate clients. Davis charges customers at a billing rate equal to 134% 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. Davis allocates operating overhead to jobs based on professional hours spent on the job. Davis estimates its five professionals will incur a total of 10,000 professional hours working on client jobs during the year. (Click the icon to view the operating cost information.) Requiren 0 Requirements The curre 1. 2. 3. Calculate the current indirect cost allocation rate per professional hour. Calculate the total amount that would be billed to Larson given the current costing structure. Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs. Calculate the amount that would be billed to Larson using ABC costing. Which type of billing system is more fair to clients ? Explain. 4. 5. Print Done Enter any number in the edit fields and then click Check Answer. A parts O remaining Clear All esc Q Search or type URL @ # $ %

Answer 1

1) Estimated total indirect costs Estimated direct professional hours Allocation rate per professional hour $224,000 10,000 $22.40 [$224000 / 10000 hours] 2) Amount of professional hours used by the job 20 Professional charges for hours spent Operating overhead costs allocated to the job Total costs recorded for the job Billing rate on job's total cost Total amount that would be billed to Larson $1,260 [20 hours x $63] $448 [20 hours x $22.4] $1,708 134% $2,288.72 ($1708 x 134%] or = $2,289 [lf rounded off to zero decimal] 3) Śc Activity Cost Pool Transportation Blueprint copying Office support Cost Driver Round-trip mileage # of copies Secretarial time Activity Cost $9,000 $35,000 $180,000 Volume Activity Rate 15,000 $0.60 [Rate = $9000 / 15000 = $0.60; Volume = 2000 + 13000 = 15000] 1,000 $35.00 [Rate = $35000 / 1000 = $35.00; Volume = 450 + 550 = 1000] 5,000 $36.00 [Rate = $180000 / 5000 = $36.00; Volume = 2700 + 2300 = 5000]

4) Activity Activity Operating overhead costs assigned to job: Rate Usage Transportation $0.60 120 Blueprint copying $35.00 Office support $36.00 17 Operating overhead costs assigned to job: Professional charges for hours spent Total costs recorded for the job Billing rate on job's total cost Total amount that would be billed to Larson Activity Cost $72 [$0.6 x 120] $140 ($35 x 4] $612 [$36 x 17] $824 $1,260 [20 hours x $63] $2,084 134% $2,792.56 ($2084 x 134%] or = $2,793 [lf rounded off to zero decimal] 5) Activity-based-cost overhead allocation method is more fair to allocate overhead costs to clients because this method allocates overhead costs rationally based on actual usage of operating activities.