C6.44 LO 6.7 6.8 Job costing using client cost sheet; fraud investigation: accounting firm Spicer and Rabbit is an accounting firm that specialises in fraud investigation. In May, Jackson McInnes, the general manager of Jazz Industries, approached John House, a partner of Spicer and Rabbit, to discuss a problem that has arisen in one of his warehouses. McInnes is not sure whether fraud is involved, but over the past year there have been a series of unexplained inventory shortages, and he has heard rumours of some warehouse staff selling supplies for cash to friends, at greatly reduced prices. McInnes would like Spicer and Rabbit to conduct an investigation to see if there is any evidence of misappropriation. This matter is urgent and McInnes would like a final report within the next two weeks. John House agrees to undertake the investigation. He will oversee the project, Christine Miller will manage the project and Graeme Smith will assist. The following hourly labour rates apply: John House Christine Miller Partner Manager Graeme Smith Investigator $150 100 60 At the end of each week, every employee of Spicer and Rabbit completes a time sheet on-line, to account for each hour of their day. The following extracts are taken from time sheets for the three staff involved in the investigation. The Jazz Industries case has been assigned the code 4506B: John House Date 1 May Case Detail 4506B Initial meeting with McInnes 3547A Delivery of final report 4508F Initial meeting with Abox Ltd Time 1 hour 2 hours 1 hour 4506B Briefing meeting with CM and GS 1 hour 3 May 4506B Review of Investigation plan 2 hours 4508F Assessment of review 1 hour 2408D Report recommendations 1 hour 784325 Briefing to police 1 hour 4540D Meeting with lawyers 2 hours 10 May 4506B Discussion of final report with CM and GS 3 hours 11 May 4506B Delivery of final report 2 hours Christine Miller Date Case Detail Time 1 May 4506B 4506B Initial meeting with McInnes Briefing meeting with JH and GS 1 hour 1 hour 2 May 4506B Review of Investigation plan with GS 2 hours

Spicer and Rabbit calculate a predetermined overhead rate to cover support staff salaries, office rent, utilities and telecommunications costs, marketing costs and other costs of running the firm. Professional labour costs make up about 75 per cent of the firm's total operating costs. The anticipated overhead cost for the current year is $4000 000. Required 1. Calculate the predetermined overhead rate per dollar of professional labour. 2. Explain how the firm can justify using a single overhead rate to cost each case. 3. Use the information in the time sheets to prepare a client cost sheet for the Jazz Industries Investigation, similar to that in Exhibit 6.8. 4. Determine the total cost of the investigation. 5. Spicer and Rabbit operate in a very competitive market and cannot always charge clients prices sufficient to cover the full cost of undertaking a case. In the light of this information:

(a) Why would Spicer and Rabbit require staff to fill in detailed time sheets?

(b) What use could the partners make of the client cost sheet and the total cost of the case?

(c) How could John House justify undertaking the investigation of Jazz Industries at a loss? 6. If Spicer and Rabbit introduced a client billing system, in what ways would it differ from their costing system described above? 7. Would you recommend that Spicer and Rabbit use a client costing system, a client billing system or both? Explain your answer.

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6592F Delivery of final report 4 hours 3 May 4506B On-site review of inventory ordering systems 5 hours 4506B Interviews with suppliers 3 hours 6 May 4506B Consultation with GS 2 hours 4506B 4508F Interview of key managers Review of transactions 3 hours 3 hours 9 May 4506B Meeting with GS to review report 2 hours 4508F Computer audit of master files 6 hours 10 May 4506B Discussion of final report with JH and GS 3 hours Graeme Smith Date Case Detail Time 1 May 4506B 2 May 4506B Briefing meeting with JH and CM Preparation of investigation plan 1 hour 6 hours 4506B Review of investigation plan with CM 2 hours 3 May 4506B Initial Interviews with warehouse staff 4 hours 4506B Documentation of ordering procedures 4 hours 6 May 4506B Consultation with CM 2 hours 4506B Character checks of key employees 4 hours 4506B Checking of supplier history 2 hours 7 May 4506B Checking of supplier history 2 hours 4506B Random check of inventory and supplier transactions 6 hours 8 May 4506B Preparation of draft report 8 hours 9 May 4506B Meeting with CM to review report 2 hours 4506B Edit report 3 hours 10 May 4506B Discussion of final report with JH and CM 3 hours