Question - Mike Mann, the president of Tax Ezy, is examining alternate ways to compute indirect-cost rates. He collects the following information from the budget for 2002:
1. Budgeted variable indirect costs: $10 per hour of professional labour hour
2. Budgeted fixed indirect costs: $50,000 per quarter
The budgeted billable professional labour-hours per quarter are:
January - March 20,000 hours
April - June 10,000 hours
July - September 4,000 hours
October - December 6,000 hours
Mike pays all tax professionals employed by Tax Ezy on an hourly basis ($30 per hour). Tax Ezy's job-costing system has a single direct-cost category (professional labour at $30 per hour) and a single indirect-cost pool (office support that is allocated using professional labour-hours). Tax Ezy charges clients $65 per professional labour-hour.
Required: (show your calculations)
1. Compute the budgeted indirect-cost rate per professional labour-hour using
a. Quarterly budgeted billable hours as the denominator
b. Annual budgeted billable hours as the denominator
2. Compute the operating income for the following four customers using
a. Quarterly indirect-cost rates
b. An annual indirect-cost rate
Stan Hansen; 10 hours in February
Ken Kai: 6 hours in March and 4 hours in August
Lelani Patera: 4 hours in June and 6 hours in August
Evelyn Stevens: 5 hours in January, 2 hours in September, and 3 hours in November
3. Comment on your results in requirement 2.