Job Costing in a Service Industry Howe and Halling, Certified Public Accountants, use a form of job-costing system. In this respect they are similar to many professional service firms, such as management consulting firms, law firms, and professional engineering firms.

An auditing client may be served by various staff who hold professional positions in the hierarchy from partners to managers to senior accountants to assistants. In addition, there are secretaries and other employees.

Suppose that Howe and Halling have the following budget for 19_2:

Compensation of professional staff $4,000,000 Other costs _ 2,400,000 Total budgeted costs $6,400,000 Each professional staff member must submit a weekly time report, which is used to assign costs to jobs. An example is the time report of a senior accountant:

WEEK OF JANUARY 8 Ss M T WwW Tl E Ss TOTAL Chargeable hours:

Client A 8 8 5 21 Client B 3 4 7 Etc.

Nonchargeable hours:

Professional development

(attending seminar on computer auditing) 8 8 Unassigned time 4 4 Total 0 8 8 8 8 8 0 40 In turn, these time reports are used for charging hours to a client job-order sheet, summarized as follows for client A:

WEEK OF Total Billing Total Employees Charged Jan. 8 Jan. 15 Hours Rates Billed Partners 4 4 8 $100 $ 800 Managers 4 4 8 60 480 Seniors 21 30 51 40 2,040 Assistants 48 0 118 20 2,360 Total hours 77 108 185 $5,680 In many cases these job-cost sheets bear only a summary of the hours charged. Each class of labor is billed at an appropriate hourly rate, so that the job-cost sheet is the central basis for billing the client.

. Suppose that this firm had a policy of charging overhead to jobs at a predetermined percentage of the salaries charged to the job. The experience of the firm has been that chargeable hours average 80 percent of available hours for all categories of professional personnel. The nonchargeable hours are regarded as additional overhead. What is the overhead rate as a percentage of the “direct labor,” the chargeable professional compensation cost?

. Compute the total cost of the Client A job for the two weeks that began January 8. Be as specific as possible‘ Assume that the average weekly compensation (based on a 40-hour week) of the personnel working on this job is: partners,

$2,000; managers, $1,200; seniors, $800; assistants, $400.

. As the tabulation for Client A implies, the job order often consists of only the time and no costs. Instead, the revenue is computed via multiplying the time by the billing rates. Suppose the partners’ profit objective is 20 percent of the total costs budgeted. What predetermined percentage of the salaries charged to the jobs would be necessary to achieve a total billing that would ultimately provide the profit objective? That is, what is the billing rate as a percentage of “direct labor’?

. In addition to billing, what use might you make of the data compiled on the job orders?