Mike Rotundo, the president of Tax Assist, is examining alternative ways to compute indirect cost rates. He collects the following information from the budget for 2016:
• Budgeted variable indirect costs: $12 per hour of professional labour time
• Budgeted fixed indirect costs: $60,000 per quarter
The budgeted billable professional labour-hours per quarter are:
January-March........................24,000 hours
April-June..............................12,000 hours
July-September.........................4,800 hours
October-December.....................7,200 hours
Rotundo pays all tax professionals employed by Tax Assist on an hourly basis ($36 per hour, including all fringe benefits).
Tax Assist's job-costing system has a single direct cost category (professional labour at $36 per hour) and a single indirect cost pool (office support that is allocated using professional labour-hours).
Tax Assist charges clients $78 per professional labour-hour. All four jobs described below use 10 hours of professional labour time.
Required
1. Compute budgeted indirect cost rates per professional labour-hour using
a. Quarterly budgeted billable hours as the denominator.
b. Annual budgeted billable hours as the denominator.
2. Compute the operating income for the following four customers using
a. Quarterly based indirect cost rates.
b. An annual indirect cost rate.
• Stan Hansen: 10 hours in February.
• Lelani Kai: 6 hours in March and 4 hours in April.
• Ken Patera: 4 hours in June and 6 hours in August.
• Evelyn Stevens: 5 hours in January, 2 hours in September, and 3 hours in November.
3. Comment on your results in requirement 2.