Step 1:
Review the budgeted income statement (Exhibit 1) for the current year. Use and EXCEL file. The budgeted income statement appears as the first sheet in the EXCEL file under the label "Exhibit 1 budgeted income statement".
The four partners work 2,000 hours a year and estimate that they are able to charge 80% of their time to clients. Thus, some of the professional labor costs are assigned to overhead. Currently, the firm's accounting system only treats professional hours as direct. All other costs, such as the paralegal costs are treated as overhead. Determine the overhead rate per productive professional direct labor hour. Be sure you distinguish between the cost associated with each client as compared to the amount billed to each clients for services rendered.
Calculate the overhead application rate using the traditional method, using the sheet "traditional overhead rate" sheet"
Step 2:
Use the sheet labeled "Exhibit 4 - Traditional vs. ABC" to show the total costs charged to each of the five clients for the month of January using the traditional cost allocation method. billed Use the overhead application rate you calculated in step Then determine the amount of revenue billed to each client. Remember, clients are billed for both paralegal hours and professional hours. Finally, determine the profitability by client for the month of January using the traditional cost allocation method.
Step 3: Milestone 2 ABC analysis (7 cost pools) using Same Excel file
Satisfied that your traditional job-order costing analysis and allocation are correct, you apply activity-based costing to determine the cost associated with the same five clients for the month of January.
You want to show the firm how activity-based costing will lead to a more precise allocation of costs. Further, one goal is to demonstrate to the partners, that having access to reporting with more precise allocation of costs will lead to more effective decisions to improve profitability. In this step, you will prepare an activity-based cost analysis associated with clients for the month of January. To accomplish this task, you have identified seven cost pools (Exhibit 2 ABC Cost Pools) and use the information provided by the law firm (Exhibit 3 ABC Cost Drivers) to review the cost drivers. For each cost pool.
Remember, partners are paid $500 an hour and paralegals are paid $40 per hour. The firm also tracks travel expenses that are directly associated with a client. In addition, library and research costs can be traced directly to each client. The firm's accounting department provided you with an estimate of the activity expected for each of the three cost pools for the year.
|
Cost pool
|
Estimated total hours
|
Estimated productive (chargeable) hours
|
|
Library and Research Support Staff Hours
|
5,000
|
3,600
|
|
General Staff Hours
|
5,000
|
4,000
|
|
Paralegal Salary
|
20,000
|
16,000
|
Cost pool Estimated total hours Estimated productive (chargeable) hours
Library and Research Support Staff Hours 5,000 3,600
General Staff Hours 5,000 4,000
Paralegal Salary 20,000 16,000
The indirect costs will be assigned to the following cost pools.
1. Telephone for making appointments and responding to clients
2. Photocopying
3. General office overhead
Thus, there are seven cost pools as shown in Exhibit 3 of this case.
The Library and Research Support Cost Pool expenses will be allocated based on library and research staff labor hour, the Telephone and Photocopying Cost Pool expenses will be allocated on the basis of general staff hour, and General office overhead is allocated on the basis of professional direct labor hours.
Use Exhibit 3 - ABC Cost Driver" to calculate the cost driver rates for the 7 cost pools. You should determine a cost driver rate for each of the cost pools.
When determining the cost driver rates consider whether to use the estimated total hours associated with the cost pools or only the productive (chargeable) hours.
Develop the costs associated with each client when ABC cost allocation is used. Use Exhibit 4 Traditional vs. ABC to calculate the costs associated with each client using the ABC cost allocation method. Then show the profitability by client using the ABC cost allocation method
Compare the costs and profits allocated to the five clients under the two cost allocation methods. In step 5 you will analyze the differences in sufficient detail to explain the differences in a memo to management.
Step 4.
Use a WORD document, prepare a memo to management first explaining the two approaches to determining a client's profitability. Your memo should include at least two professional sources that addresses the issues related to Activity-Based Costing. Be sure to cite your references.
Describe how the costs and profits assigned to each client under (1) traditional costing and (2) activity-based costing were determine. Then provide a detailed explanation for why there are differences. Your explanation should discussion how different activities consume different resources. Conclude with a recommendation for how to use the information generated by the ABC analysis to better manage the firm's resources.
Your memo should include at least 2 references to professional literature with proper citations.
You anticipate resistance from two of the partners, so your report should also include the benefits of implementing the ABC system as well as how to overcome resistance to change.
NOTE - THERE IS NO WORD LIMIT OR EXPECTATION PREPARE THE MEMO TO MANAGEMENT AS EFFICIENTLY AND EFFECTIVELY AS NEEDED TO INCLUDE ALL OF THE REQUIRE ELEMENTS.
Step 5.
Continue with the same WORD document, however, you will prepare a separate memo. You now believe that seven cost pools might be too complex for the firm to maintain. Suggest ways to reduce the complexity and apply the changes to your analysis. . Support your calculations with a revised Excel file showing less than 7 cost pools. Label the sheet ABC Revised.
Your report should refer to your analysis and discuss the trade-off of using seven cost pools as compared to a smaller number of cost pools.
Step 6.
Continue with the same WORD document, However, you will prepare a separate memo. The partners agree the ABC costing model provides better information and will consider implementing it. However, they feel you should now focus your attention to whether or not to continue in-house library and research services or outsource these services to an external firm. You have requested quotes from vendors who supply this service. One vendor is willing to provide the service at a flat fee of $2,250 per month. Another vendor will provide the service based on an hourly fee of $30. Determine the annual costs that would have been incurred for each of the two outsourcing alternatives. Present your report using incremental analysis.
Prepare a memo or incremental report comparing the projected cost of each of the three alternatives:
(1) keep the library and research services in-house
(2) use the fixed cost vendor, and
(3) use the variable cost vendor.
Include in your report the non-quantifiable (qualitative) advantages and disadvantages
Attachment:- file for project.xlsx