P6.41 LO 6.8 Estimating service costs; ethical issues: accounting firm Goggin and Partners is a chartered accounting firm specialising in income tax returns for medical practitioners. By specialising, the firm has been able to build up expertise in accounting for medical practices, and can charge healthy fees because of its in-depth knowledge in the area. Among the firm's clients are Dr Laurel and Dr Costello, two general practitioners from rural practices of approximately the same size and business structure. Laurel and Costello were at medical school together but had not kept in touch. Recently they bumped into each other at the Australian Medical Association's Christmas party. During the evening, the conversation turned to their tax returns. Laurel and Costello were amazed to find they paid significantly different amounts to have their tax returns prepared. They use the same accountants and have the same billing system, roughly the same number of patients and even the same number of staff. The next day Laurel, who last year paid nearly 50 per cent more than Costello, challenged the managing partner, Brent Goggin, over the charges. He assured Laurel that the firm uses a very accurate costing system that tracks costs for five different categories of professional labour to individual clients. Professional labour costs are marked up by 150 per cent to cover other costs and generate a profit. He promised to investigate the problem.

The following are the records for Laurel and Costello for last year: Laurel Costello Senior partner (@ $150 per hour) $ 300 $ 75 Partner ($125 per hour) 250 125 Manager (@$80 per hour) 80 80 Supervisor ($50 per hour) 100 150 Graduate (@$30 per hour) 15 90 Total cost of labour 745 520 Markup (rounded) 1118 780 Total charge to client $1863 $1300 Goggin investigated both jobs and found that they had involved similar work but that Laurel's job had used more senior staff because, at the time, junior staff were tied up on other projects, including completing Costello's tax return! Both projects had also made similar use of resources other than professional labour. Required 1. Does the costing system used by Goggin and Partners provide a reliable estimate of:

(a) professional labour costs

(b) cost of other resources used in preparing clients' tax returns? 2. Does the costing system provide a reasonable basis for estimating the charges to clients? Explain. 3. How could Goggin and Partners improve their costing/chargeout system? 4. If you were Brent Goggin, how would you respond to Laurel's query?