Allocation of total costs using Activity-Based costing.
Lucy Cook, CPA, J.D., provides accounting and tax and legal services to her clients. In 2007, she charged $175 per hour for accounting and $200 per hour for tax and legal services. Erin estimates the following costs for the year 2008.
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Office supplies, advertising and miscellaneous
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$32,000
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Computer fees
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48,000
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Secretary's salary
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50,000
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Rent
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36,000
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$166,000
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Operating profits declined last year and Ms. Cook has decided to use activity based costing ABC. procedures to evaluate her hourly fees. She has gathered the following information from last year's records:
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Activity Levels
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Activity
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Cost Driver
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Accounting
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Tax and legal services
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Office supplies
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Hours billed
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1,000
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1,000
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Computer fees
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Computer hour used
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250
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750
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Secretary's salary
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Number of clients
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32
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168
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Rent
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Types of services offered
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1
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1
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Required:
(a) What is the total cost allocated to Accounting services using Activity-Based costing ABC.?
(b) Lucy wants her hourly fees for the tax and legal services to be 200% of their activity-based costs. What is the fee per hour for each type of service Lucy offers?
(c) A major client has requested accounting services. However, Lucy is already billing 100% of her capacity (2,000 hours per year) and is reluctant to shift 200 hours away from her tax and legal services to meet this client's request. What is the minimum fee per hour that Lucy could charge this client for accounting services and be no worse off than last year? Assume that Activity-Based Costing ABC. is used.
(d) Without regard to your answer in requirement c, assume that Lucy must charge $300 per hour to shift the client's work from tax and legal services to accounting services. What would you advise Lucy to do?