BensonBenson & Company is an architectural firm specializing in home remodeling for private clients and new office buildings for corporate clients. charges customers at a billing rate equal to % of the client's total job cost. A client's total job cost is a combination of (1) professional time spent on the client ( per hour cost of employing each professional) and (2) operating overhead allocated to the client's job. allocates operating overhead to jobs based on professional hours spent on the job. estimates its five professionals will incur a total of 10,000 professional hours working on client jobs during the year. AllissaAllissa LarsonLarson hired BensonBenson to design her kitchen remodeling. A total of 35 professional hours were incurred on this job. In addition, LarsonLarson's remodeling job required one of the professionals to travel back and forth to her house for a total of 155 miles. The blueprints had to be copied four times because LarsonLarson changed the plans several times. In addition, 14 hours of secretarial time were used lining up the subcontractors for the job.

All operating costs other than professional salaries (travel reimbursements, copy costs, secretarial salaries, office lease, and soforth) can be assigned to the three activities. Total activity costs, cost drivers, and total usage of those cost drivers are estimated as follows:

Activity Total Activity Cost Cost Driver Usage Total Usage by Corporate Clients Total usage by Private Clients

Transporation to clients. . . . . . $9,000 Round-trip mileage to clients. . . . . 1,500 miles 13,500 miles
Blueprint copying. . . . . . . . . . . 35,000 Number of copies. . . . . . . . . . . . 250 copies 750 copies
Office support. . . . . . . . . . . . . . 190,000 Secretarial time. . . . . . . . . . . . . . . 2,600 secretarial 2,400 secretarial
hours hours
Total operating overhead. . . . $234,000

Required:
a. Calculate the current indirect cost allocation rate per professional hour.
b. Calculate the total amount that would be billed to LarsonLarson given the current costing structure.
c. Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs.
d. Calculate the amount that would be billed to LarsonLarson using ABC costing.
e. Which type of billing system is more fair to clients? Explain.

Benson & Company

a. Current indirect cost allocation rate per professional hour = Total overhead divided by 10,000 professional hours

$234,000/10,000

= $23.40

b. Total amount that would be billed to Larson with the current costing structure:

= $23.40 * 35

= $819.00

c. Overhead Rates based on ABC:

Transport to clients  = $0.60 ($9,000/15,000)

Blueprint copying =   $35.00 ($35,000/1,000)

Office support =        $38.00 ($190,000/5,000)

d. Larson's Job based on ABC:

Transport to clients  = $93 ($0.60 * 155)

Blueprint copying =      140 ($35.00 * 4)

Office support =          532 ($38.00 * 14)

                 Total       $765

e. With Benson Company using ABC billing system to charge Larson, the system is fairer to clients generally, because it takes into consideration the volume of each activity consumed per client. Customers are charged based on actual activities consumed, and not based on some arbitrary figures.  It is more reflective of the cost structure of the business and offers the best quality service to customers because price is determined by volume of activities.

Explanation:

a) Data and Calculations:

Professional hours spent on Larson job = 35 hours

Travel = 155 miles

Blueprints copies = 4

Secretarial time = 14 hours

Other operating costs:

Activity           Total Activity  Cost Driver  Total Usage by    Total Usage by

                             Cost             Usage    Corporate Clients    Private Clients      

Transportation                 Round-trip mileage

to clients           $9,000    to clients                1,500 miles      13,500 miles

Blueprint

 copying           35,000   Number of copies   250 copies        750 copies

Office support  190,000  Secretarial time       2,600 secretarial 2,400 secretarial  hours hours

Total operating overhead   $234,000

Estimated professional hours = 10,000

Overhead Rate = $23.40

Larson's Job:

Overhead cost = $23.40 * 35 = $819.00

Overhead Rates based on ABC:   Larson's Job

Transport to clients  = $0.60          $93 ($0.60 * 155)

Blueprint copying =   $35.00           140 ($35.00 * 4)

Office support =        $38.00          532 ($38.00 * 14)

                                      Total        $765

the answer is a.

by: nicholas dooley

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