Kendle and Watson, a CPA 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. Bellamy Kendle 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 are as follows:

1. Using 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 audit function?

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Activity Professional Cost Driver Activity Cost Rate £2,000 per Activity Usage 50 employees Number of development Administration Client employees Number of jobs Number of new employee E1,000 per job E5,000 per new 50 jobs 29 new clients development clients client