Question

6-13 Alternative allocation bases for a professional services firm. The Wilmer Group (WG) provides tax advice to multinational firms. WG charges clients for (a) direct professional time (at an hourly rate) and (b) support services (at 30% of the direct professional costs billed). The three professionals in WG and their rates per professional hour are as follows. Professional Bilfing Rale per Hour Mark Wilmer $500 Ashley Bennet 170 John Amesbury 70 WG has just prepared the May 2013 bills for two clients. The hours of professional time spent on each client are as follows. Hours per Client Professional San Antonio Dominion Amsterdam Enterprises Wilmer 21 Bennet Amesbury Total 55 4 11 30 41 55 1. What amounts did WG bill to San Antonio Dominion and Amsterdam Enterprises for May 2013? 2. Suppose support services were billed at $55 per professional labor-hour (instead of 30% of professional labor costs). How would this change affect the amounts WG billed to the two clients for May 2013? Com- ment on the differences between the amounts billed in requirements 1 and 2.

Answer 1

Solution

Wilmer Group (WG)

1. Determination of the amounts WG bill to San Antonio Dominion and Amsterdam Enterprises for May 2013:

Amounts billed to –

San Antonio Dominion = $17,654

Amsterdam Enterprises = $8,112

Schedule showing the billed amounts -

San Antonio Dominion Hours Billing Rate Total Cost Wilmer 21 $500 $10,500 Bennet 4 $170 $680 Amesbury 30 $70 $2,100 Total direct professional cost $13,580 Support Services Cost at 30% $4,074 Total billed Cost $17,654 Amsterdam Enterprises Hours Billing Rate Total Cost 3 $500 $1,500 11 $170 $1,870 41 $70 $2,870 $6,240 $1,872 $8,112

Computation –

Support service cost at 30% of direct professional cost

Billed to San Antonio Dominion = 30% x 13,580 = $4,074

1. Assuming support services billed at $55 per hour, determination of the amounts WG billed to San Antonio and Amsterdam Enterprises for May 2013:

Amounts billed to –

San Antonio Dominion = $16,605

Amsterdam Enterprises = $9,265

Schedule showing the billed amounts -

Wilmer Bennet Amesbury Total direct professional cost Support Services Cost at $55per hour Total billed Cost San Antonio Dominion Hours Billing Rate Total Cost 21 $500 $10,500 4 $170 $680 30 $70 $2,100 $13,580 Amsterdam Enterprises Hours Billing Rate Total Cost 3 $500 $1,500 11 $170 $1,870 41 $70 $2,870 $6,240 55 $55 55 $55 $3,025 $16,605 $3,025 $9,265

How would this change affect the amounts billed to the two clients for May 2013 –

The change in billing support cost from 30% of total direct professional cost to $55 per hour reduced the total billed amount from $17,654 to $16,605 for the client San Antonio Dominion. While, the change increased the total billed amount from 8,112 to $9,265 for Amsterdam Enterprises.

Comment –

The difference in billed amounts for the clients resulted from the change in basis of allocation of support services cost. The first method uses direct professional cost as the basis, while the second approach uses a direct labor rate. The company needs to adopt the allocation basis for support services depending upon the usage of support services to accurately reflect the usage of resources.