Question

please do B

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: Overhead cost Secretarial support Supplies Computer costs Cost driver Number of clients Transactions with clients Computer hours Tax 72 200 1,000 Activity Level Consulting 48 300 600 Total 120 500 1,600 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

Solution a. Computation of profit per hour using direct labour as only overhead cost driver Table Showing Allocation of Expenses on Direct labour hours Particulars Amount Expenses - All overhead (A) $ 1,96,000.00 Direct Labour hours (B) 4000 Labour hour rate (A/B) 49.00 per hour Allocation of expenses: Tax prep- ($49 x 1300 hours) 63,700.00 Consulting-($49 x 2700 hours) 1,32,300.00 Table Showing Profit per labour hour Particulars Tax Preparation Revenues 1,30,000.00 Less: Allocated expenses 63,700.00 Profit (A) 66,300.00 Labour Hours (B) 1300 Profit per hour (A/B) 51.00 $ $ $ Consulting 2,70,000.00 1,32,300.00 1,37,700.00 2700 51.00 $

Solution b. Table Showing per driver cost - Activity Based costing Activity Overhead Cost Amount ($) Total Cost per driver Secretarial support 84000 120 84000/120 = 700 per client Supplies 72000 500 72000/500 = 144 per transaction Computer costs 48000 1600 48000/1600= 30 per computer hr Table showing Allocation of cost of services Activity Based costing Particulars Tax Preparation Consulting Secretarial Support @ $700 per client 72 x $700 = 50,400.00 48 x $700 = 33,600.00 Supplies @ $144 per transaction with client 200 x $144 = 28,800.00 300 x $144= 43,200.00 Computer Costs @ $30 per computer hour 1000 x $30 = 30,000.00 600 x $30 = 18,000.00 Total of over head per service 1,09,200.00 94,800.00 Table Showing Profit per labour hour Particulars Tax Preparation Revenues $ 1,30,000.00 $ Less: Allocated expenses 1,09,200.00 $ Profit (A) 20,800.00 $ Labour Hours (B) 1300 Profit per hour (A/B) 16.00 $ Consulting 2,70,000.00 94,800.00 1,75,200.00 2700 64.89

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