Question

7-69. Predetermined Rates, Job Costing, Service Firms, Product-Line Profitability (10 7-3) A&R Quality Advisors is a small consulting firm offering quality audits and advising services to small and mid-sized manufacturing firms. Quality audits entail reviewing, checking, and documenting quality practices within a firm. Quality advising entails making recommendations for new or revised quality practices. Other firms in the area offer one or both of these services, although the competition for quality audit jobs is stronger than for quality advising. In addition to senior executives, A&R employees are either staff or managers. Staff employees are usually younger with less experience. Managers, who oversee the staff on jobs, are more experienced. The average hourly wage is $60 for staff and $150 for managers. (Both staff and managers are paid an annual salary: these hourly costs are based on 2,000 average annual hours worked.) Staff are expected to spend at least 90 percent of their time on billable work. Because of administrative work associated with supervising the staff and the expectation that managers will spend a portion of their time seeking new business, managers are expected to spend about 50 percent of their time on billable work. A&R employs ten staff and two managers. In addition to staff and manager costs, A&R has overhead and administrative costs of $4,500,000, of which about $1.500.000 is variable with respect to billable hours. Overhead and administrative costs include the non-billable cost of the staff and managers. Selected information on billable hours expected for the next year follow.

Answer 1

Answer to question a:

$75 i.e. Variable overhead cost of $15,00,000/20000 total billable hours since variable cost can be only apportioned

Answer to question b:

	Billable audit hours	Rate per hour	total billing
	Staff	Manager	Staff	Manager	Staff	Manager	Total
Client 2	$                             70.00	$   10.00	$                        200.00	$       500.00	$      14,000.00	$        5,000.00	$    19,000.00

Answer to question c:

	Billable audit hours	Costing per hour	Total cost
	Staff	Manager	Staff	Manager	Overheads	Staff	Manager	Overheads	Total
Client 2	$70.00	$ 10.00	$                60.00	$150.00	$      75.00	$4,200.00	$1,500.00	$6,000.00	$11,700.00

Answer to question d:

	Billable audit hours	Rate per hour	total billing
	Staff	Manager	Staff	Manager	Staff	Manager	Total
For all clients	$8500	$1200	$200	$500	$1700000	$600000	$2300000

Answer to question e:

	Billable audit hours	Costing per hour	Total cost
	Staff	Manager	Staff	Manager	Overheads	Staff	Manager	Overheads	Total
For all clients	$8,500.00	$1,200.00	$   60.00	$ 150.00	$   75.00	$5,10,000.00	$1,80,000.00	$7,27,500.00	$ 14,17,500.00

Answer to question f:

	Billable Advising Hours	Costing per hour	Total cost
	Staff	Manager	Staff	Manager	Overheads	Staff	Manager	Overheads	Total
Total	$                       9,500.00	$ 800.00	$                           60.00	$       150.00	$              75.00	$   5,70,000.00	$ 1,20,000.00	$7,72,500.00	$ 14,62,500.00

Answer to question g:

	Billable audit hours	Billing rate per hour	Cost per hour	Total billing	Total cost
	Staff	Manager	Staff	Manager	Staff	Manager	Overheads	Staff	Manager	Total	Staff	Manager	Overheads	Total	Profit
Total	$                       8,500.00	$1,200.00	$                         200.00	$       500.00	$              60.00	$            150.00	$            75.00	$ 17,00,000.00	$   6,00,000.00	$ 23,00,000.00	$5,10,000.00	$1,80,000.00	$7,27,500.00	$ 14,17,500.00	$8,82,500.00

Answer to question h:

	Billable Advising Hours	Billing rate per hour	Cost per hour	Total billing	Total cost
	Staff	Manager	Staff	Manager	Staff	Manager	Overheads	Staff	Manager	Total	Staff	Manager	Overheads	Total	Profit
Total	$                       9,500.00	$    800.00	$                         200.00	$       500.00	$              60.00	$            150.00	$            75.00	$ 19,00,000.00	$   4,00,000.00	$ 23,00,000.00	$5,70,000.00	$1,20,000.00	$7,72,500.00	$ 14,62,500.00	$8,37,500.00