Question

MUF, a Chartered Accounting firm, has provided audit and tax services to businesses in the London area for over 50 years. Recently, the firm decided to use ABM and activity-based costing to assign its overhead costs to those service functions. Ginny Fior is interested in seeing how the change from the traditional to the activity-based costing approach affects the average cost per audit job. The following information has been provided to assist in the comparison:
Total direct labor costs ........ £400,000
Other direct costs .......... 120,000
Total direct costs ......... £520,000
The traditional costing approach assigned overhead costs at a rate of 120 percent of direct labor costs.
Data for activity-based costing of the audit function follow.


Your instructor will divide the class into groups to work through the case. One student from each group should present the group’s findings to the class.
1. Using traditional costing and direct labor cost as the cost driver, calculate the total costs for the audit function. What is the average cost per job?
2. Using activity-based costing to assign overhead, calculate the total costs for the audit function. What is the average cost per job?
3. Calculate the difference in total costs between the two approaches. Why would activity-based costing be the better approach for assigning overhead to the auditfunction?


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  • CreatedMarch 26, 2014
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