Callaghan and Associates is a firm of chartered accountants specializing in the preparation of income tax returns for medical practitioners. By specializing, the firm has been able to build up expertise in the accounting for medical practices, as well as charge a healthy fee because of its in-depth knowledge in the area. Among the firm's clients are Dr Watson and Dr Holmes, two general practitioners from rural practices of approximately the same size and business structure.
Watson and Holmes were at medical school together but had not kept in touch. Recently they bumped into each other at the Australian Medical Association's Christmas party. During the evening, the conversation turned to tax, and then to tax returns. Watson and Holmes were amazed to find that they paid significantly different amounts to have their tax returns prepared. They use the same accountants and have the same billing system, roughly the same number of patients and even the same number of staff.
The next day Watson, who last year paid nearly 50 per cent more than Holmes, challenged the managing partner, C.J. Callaghan, over the charges. He assured Watson that the firm uses a very accurate costing system that tracks costs for five different categories of professional labour to individual clients. Professional labour costs are marked up by 150 per cent to cover other costs and generate a profit. He promised to investigate the problem.

Callaghan investigated both jobs and found that they had involved similar work but that Watson's job had used more senior staff because, at the time, junior staff were tied up on other projects, including completing Holmes' tax return! Both projects had also made similar use of resources other than professional labour.
Required:
Does the costing system provide a reasonable basis for estimating the professional labour costs? Costs of other resources used in preparing clients' tax returns? Explain.
How could Callaghan and Associates improve their costing/charge-out system?

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Senior partner (@ $150 per hour) Partner(@ $125 per hour) Manager (@ $80 per hour) Supervisor (@ $50 per hour) Graduate (@$30 per hour) Total cost of labour Markup (covering overhead costs and a profit margin) Total charge to client Watson $300 250 80 100 15 745 1118 $1,863 Holmes $75 125 80 150 90 520 780 $1,300