Q1) Lucy Cook, CPA, J.D., gives 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 evaluates the costs for year 2008 given below.
| Office supplies, advertising and miscellaneous |
$32,000 |
| Computer fees |
48,000 |
| Secretary's salary |
50,000 |
| Rent |
36,000 |
| |
$166,000 |
Operating profits decreased last year and Ms. Cook has made a decision to utilize activity based costing ABC. procedures to estimate her hourly fees. She has collected the following information from last year's records:
| Activity Levels |
|
|
|
| Activity |
Cost Driver |
Accounting |
Tax and legal services |
| Office supplies |
Hours billed |
1,000 |
1,000 |
| Computer fees |
Computer hour used |
250 |
750 |
| Secretary's salary |
Number of clients |
32 |
168 |
| Rent |
Types of services offered |
1 |
1 |
Questions:
(a) Determine the total cost allocated to Accounting services by using Activity-Based costing ABC?
(b) Lucy wishes her hourly fees for tax and legal services to be 200% of their activity-based costs. Compute the fee per hour for each type of service Lucy offers?
(c) Major client has requested accounting services. Though, 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. compute the minimum fee per hour that Lucy could charge this client for accounting services and be no worse off than last year? Suppose that Activity-Based Costing ABC. is used.
(d) Without regard to the answer in requirement c, suppose that Lucy should charge $300 per hour to shift client's work from tax and legal services to accounting services. What would you suggest Lucy to do?