Refer to the Mission Data Set. Nelson suspects that her allocation of indirect costs could be giving

Question:

Refer to the Mission Data Set. Nelson suspects that her allocation of indirect costs could be giving misleading results, so she decides to develop an ABC system. She identifies three activities: documentation preparation, information technology support, and training. Nelson figures that documentation costs are driven by the number of pages, information technology support costs are driven by the number of software applications used, and training costs are most closely associated with the number of direct labour hours worked. Estimates of the costs and quantities of the allocation bases follow:

Compute the cost allocation rate for each activity.
Mission Inc. is a technology consulting firm focused on website development and integration of internet business applications. President Susan Nelson's ear is ringing after an unpleasant call from client Jerry Webb.
Webb was irate after opening his bill for Mission's redesign of his company's website. Webb said that Mission's major competitor, Delta Applications, charged much lower fees to another company for which Webb serves on the board of directors.
Nelson is puzzled for two reasons. First, she is confident that her firm knows website design and support as well as any of Mission's competitors. Nelson cannot understand how Delta Applications can undercut Mission's rates and still make a profit. But Delta Applications is reputed to be very profitable. Second, just yesterday Nelson received a call from client Keith Greg. Greg was happy with the excellent service and reasonable fees Nelson charged him for adding a database-driven job-posting feature to his company's website. Nelson was surprised by Greg's compliments because this was an unusual job for Mission that required development of complex database management and control applications, and she had felt a little uneasy accepting it.
Like most consulting firms, Mission traces direct labour to individual engagements (jobs). Mission allocates indirect costs to engagements using a budgeted rate based on direct labour hours. Nelson is happy with this system, which she has used since she established Mission in 1995.
Nelson expects to incur $706,000 of indirect costs this year, and she expects her firm to work 5,000 direct labour hours. Nelson and the other systems consultants earn $350 per hour. Clients are billed at 150% of direct labour cost. Last month, Mission's consultants spent 100 hours on Webb's engagement.
They also spent 100 hours on Greg's engagement.