Referring to P9-8, Compare the results of the cost allocations to the Ford Products and Mickey's Markets jobs under the simplified costing system and the activity-based costing system. Label each difference as undercosted or overcosted relative to the simplified costing system.
In P9-8, Coleman and Rizzuto, architects, have been using a simplified costing system in which all professional labor costs are included in a single direct cost category, professional labor; and all over head costs are included in a single indirect cost pool, professional support, and allocated to jobs using professional labor hours as the allocation base. Consider two clients: Ford Products, which required 50 hours of design work for a new addition, and Mickey's Markets which required plans for a new store that took 20 hours to draw. The firm has two partners, who each earn a salary of $150,000 a year, and four associates who each earn $60,000 per year. Each professional has 1,500 billable hours per year. The professional support is $360,000, which consists of $120,000 of design support and $240,000 of administrative support. Ford's job required 30 hours of partner time and 20 hours of associate time. Mickey's job required 5 hours of partner time and 15 hours of associate time.