Question

LO6.7 6.8 Job costing using client cost sheet; fraud investigation: accounting firm

Black and White is an accounting firm that specializes in fraud investigation. In June, Jackson Maximillen the general manager of Jazzy Industries, approached Michael House, a partner of Black and White, to discuss a problem that has arisen in one of his warehouses. Maximillen is not sure whether fraud is involved or not, but over the past year there have been a series of unexplained inventory shortages, and he has heard rumors of some warehouse staff selling supplies for cash to friends, at greatly reduced prices. Maximillen would like Black and White to conduct an investigation to see if there is any evidence of misappropriation. This matter is urgent and Maximillen would like a final report within the next two weeks. Michael House agrees to undertake the investigation. He will oversee the project; William will manage the project and Gabriel will assist. The following labor rates apply:

Michael House	Partner	$150
William	Manager	$100
Gabriel	Investigator	$60

At the end of each week, every employee of Black and White completes a time sheet online, to account for each hour of their day. The following extracts are taken from time sheets for the three staff involved in the investigation. The Jazzy Industries case has been assigned the code 4506B:

Michael House
Date	Case	Detail	Time (Hours)
1 June	4506B	Initial meeting with Maximillen	1
	3547A	Delivery of final report	2
	4508F	Initial meeting with Aboz Ltd	1
	4506B	Briefing meeting with William and Gabriel	1
3 June	9506B	Review of investigation plan	2
	4508F	Assessment of review	1
	2408D	Report recommendations	1
	78432S	Briefing to police	1
	4540D	Meeting with lawyers	2
10 June	4506B	Discussion of final report with William and Gabriel	3
11 June	4506E	Delivery of final report	2

William
Date	Case	Detail	Time (Hours)
1 June	4506B	Initial meeting with Maximillen	1
	4506B	Briefing meeting with Michael House and Gabriel	1
2 June	4506B	Review of investigation plan with Gabriel	2
	6592F	Delivery of final report	4
3 June	4506B	On-site review of inventory ordering systems	5
	4506B	Interviews with suppliers	3
6 June	4506B	Consultation with Gabriel	2
	4506B	Interview of key managers	3
	4508B	Review of transactions	3
9 June	4506B	Meeting with Gabriel to review report	2
	4508B	Computer audit of master files	6
10 June	4506B	Discussion of final report with Michael House and Gabriel	3

Gabriel
Date	Case	Detail	Time (Hours)
1 June	4506B	Briefing meeting with Michael House and William	1
2 June	4506B	Preparation of investigation plan	6
	4506B	Review of investigation plan with William	2
3 June	4506B	Initial interviews with warehouse staff	4
	4506B	Documentation of ordering procedures	4
6 June	4506B	Consultation with William	2
		Character checks of key employees	4
		Checking of supplier history	2
7 June	4506B	Checking of supplier history	2
	4506B	Random check of inventory and supplier transactions	6
8 June	4506B	Preparation of draft report	8
9 June	4506B	Meeting with William to review report	2
	4506B	Edit report	3
10 June	4506B	Discussion of final report with Michael House and William	3

Black and White calculate a predetermined overhead rate to cover support staff salaries, office rent, utilities and telecommunication costs, marketing costs. and other costs of running the firm. Professional labor costs make up about 75% of the firm's total operating costs. The anticipated overhead cost for the current year is $4 000 000.

Required:

a. Calculate the predetermined overhead rate per dollar of professional labor.

b. Explain how the firm can justify using a single overhead rate to cost each case.

c. Use the information in the time sheets to prepare a client cost sheet for the Jazzy Industries investigation, similar to that in Exhibit 6.8.

d. Determine the total cost of the investigation.

Answer 1

Answer

A) if black and white introduced a client billing system for estimating its service costs, it would gather the amounts that the client is to be charged for the service rather than by accumulating the costs of each job. it would charge fees as per chargeout rates per chargeout rates per billable hour for the partner, manager and investigator for the hours of service they have provided to cover its labour costs, overhead costs and a targeted profit margin.

B) It would be recommend that black and white use a a client billing system , it would go with current billing system by charging fees as per chargeout rates per billable hour and enable the firm to mointer its current earnings on partial completion of job and it will monitor it profitability by using realisation rates.