Comparing the results of cost allocations, using simplified costing versus activity-base...

Comparing the results of cost allocations, using simplified costing versus activity-based costing

Jim Tallon, the consultant introduced at the beginning of section two of the chapter (p. 472), has obtained the following data relative to the Gibbs & Vaughan consulting job:

Assume that the Wilkes Barre job will require 50 partner hours and 20 associate hours, while the Scranton job will require 15 partner hours and 55 associate hours.

Required:

1. a. Using a simplified costing system with one direct cost category for professional labor and one indirect cost category for support costs with professional labor hours as the allocation base, compute the bid price for the Wilkes Barre job and the Scranton job, assuming a 25% markup on cost. (Round to the nearest whole dollar.)

b. Do you think that your results seem reasonable?

2. Using an activity-based costing system with two direct cost categories for partner labor and associate labor, and two indirect cost categories, one for legal support and one for secretarial support with cost allocation bases of professional labor hours and partner labor hours, respectively, compute the bid price for the Wilkes Barre job and the Scranton job, assuming a markup of 25% on cost.

3. a. Compute the difference in bid price for each job between the simplified costing system and the activity-based costing system.

b. Were the jobs undercosted, overcosted, or a combination of each? Which job had the greater differential, depending on which costing system was used, and why?