For the past five years, Collins Ltd. has been running a consulting practice in which it provides
Question:
For the past five years, Collins Ltd. has been running a consulting practice in which it provides two major services: general management consulting and executive training seminars. The CFO is not quite sure that he is charging accurate fees for the different services he provides. He has recently read an article about activity-based costing that convinced him he could use ABC to improve the accuracy of his costing. He has gathered the following selected information concerning the consulting practice during the previous year:
In addition, the CFO gathered the following statistics for each of the two types of services provided to clients during the year:
Instructions
(a) In the past, the CFO took the total overhead costs and divided them by the total billable hours to determine an average rate. To this amount he would then add the direct labour costs per hour and double this total amount to establish his average hourly charge-out rate. What was the CFO's average hourly charge-out rate using this method?
(b) Using ABC, what would the CFO's charge-out rate be? Note that he will continue to add the overhead to the direct labour costs per hour on a service basis and then double this amount to set an average hourly charge-out rate.
(c) Identify and discuss three ways in which ABC leads to more accurate product costs.
(d) Identify and discuss two limitations of ABC.
(e) After reviewing the ABC methodology described in part (b), identify one significant flaw in how the overhead costs will be allocated by the CFO in the ABC system. Discuss how this flaw would affect the average hourly charge-out rates (that is, increase or decrease the rates) for management consulting and executive training. You do not have to calculate the new rates to answer this part of the question.
Step by Step Answer:
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118856994
4th Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly