13-52 Choice of the Cost-Allocation Bases in Accounting Firm Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is considering the desirability of tracing more costs to jobs than just direct labor. In this way, the firm will be able to justify billings to clients. Last year?s costs were as follow: Direct-professional labor $ 5,000,000 Overhead 10,000,000 Total costs $15,000,000 The following costs were included in overhead: Computer time $ 750,000 Secretarial cost 700,000 Photocopying 250,000 Fringe benefits to direct labor 800,000 Phone call time with clients (est-ed but not tabulated) 500,000 Total $3,000,000 The firm?s data processing techniques now make it feasible to document and trace these costs to individual jobs. As an experiment, in December Brenda McCoy arranged to trace these costs to six audit engagements. Two job records showed the following: Engagement Eagledale Company First Valley Bank Direct-professional labor $15,000 $15,000 Fringe benefits to direct labor 3,000 3,000 Phone call time with clients 1,500 500 Computer time 3,000 700 Secretarial costs 2,000 1,500 Photocopying 500 300 Total direct costs $25,000 $21,000 Compute the overhead application rate based on last year?s costs. Suppose last year?s costs were reclassified so that $3 million would be regarded as direct costs instead of overhead. Compute the overhead application rate as a percentage of direct labor and as a percentage of total direct costs. Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank. Solution: Accounting - 8290242.xlsx Qn: 1. Suppose that client billing was based on a 30% markup of total job costs. Compute the billings that would be forthcoming in number 3. 2. Which method of costing and overhead application do you favor? Explain.

13-52 Choice of the Cost-Allocation Bases in Accounting Firm Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is considering the desirability of tracing more costs to jobs than just direct labor. In this way, the firm will be able to justify billings to clients. Last year's costs were as follow: Direct-professional labor $ 5,000,000 Overhead 10,000,000 Total costs $15,000,000 The following costs were included in overhead: Computer time $ 750,000 Secretarial cost 700,000 Photocopying 250,000 Fringe benefits to direct labor 800,000 Phone call time with clients (est-ed but not tabulated) 500,000 Total $3,000,000 The firm's data processing techniques now make it feasible to document and trace these costs to individual jobs. Last years cost As an experiment, in December Brenda McCoy arranged to trace these costs to six audit engagements. Two job Direct labor records showed the following: 5,000,000.00 Engagement Overhead 10,000,000.00 Eagledale Company First Valley Bank Direct-professional1labor $15,000 $15,000 5,000,000.00 Fringe benefits to direct labor 3,000 3,000 Phone call time with 1,500 500 Costs included in overhead clients Computer time time Computer 750000 3,000 700 Secreterial cost costs 700000 Secretarial 2,000 1,500 Photocpoying 250000 Photocopying 500 300 Fringe benefits to direct Total direct costs 800000 $25,000 $21,000 labor Phone call time with Compute the overhead application rate based on last year's costs. clients 500000 Suppose last year's costs were reclassified so that $3 million would be regarded as direct costs instead 3000000 1 2 of overhead. Compute the overhead application rate as a percentage of direct labor and as a percentage of totalOverhead application rate based on last years data direct costs. 200% Suppose the cost 3000,000 would be regarded as direct cost it will Last year cost Direct labor Direct cost Overhead Overhead application rate as a percentage of direct labor would be Overhead application rate as a percentage of direct cost would be 5,000,000.00 3,000,000.00 7,000,000.00 15,000,000.00 140.0% 87.5% Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank. Solution: Accounting - 8290242.xlsx Qn: 1. Suppose that client billing was based on a 30% markup of total job costs. Compute the billings that would be forthcoming in number 3. 2. Which method of costing and overhead application do you favor? Explain. 13-52 Choice of the Cost-Allocation Bases in Accounting Firm Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is considering the desirability of tracing more costs to jobs than just direct labor. In this way, the firm will be able to justify billings to clients. Last year's costs were as follow: Direct-professional labor $ 5,000,000 Overhead 10,000,000 Total costs $15,000,000 The following costs were included in overhead: Computer time $ 750,000 Secretarial cost 700,000 Photocopying 250,000 Fringe benefits to direct labor 800,000 Phone call time with clients (est-ed but not tabulated) 500,000 Total $3,000,000 The firm's data processing techniques now make it feasible to document and trace these costs to individual jobs. As an experiment, in December Brenda McCoy arranged to trace these costs to six audit engagements. Two job records showed the following: Engagement Eagledale Company First Valley Bank Direct-professional labor $15,000 $15,000 Fringe benefits to direct labor 3,000 3,000 Phone call time with clients 1,500 500 Computer time 3,000 700 Secretarial costs 2,000 1,500 Photocopying 500 300 Total direct costs $25,000 $21,000 1. Compute the overhead application rate based on last year's costs. 2. Suppose last year's costs were reclassified so that $3 million would be regarded as direct costs instead of overhead. Compute the overhead application rate as a percentage of direct labor and as a percentage of total direct costs. 3. Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank. 4. Suppose that client billing was based on a 30% markup of total job costs. Compute the billings that would be forthcoming in number 3. 5. Which method of costing and overhead application do you favor? Explain. Last year's costs: Direct labor 5,000,000.00 Overhead 10,000,000.00 Total costs 15,000,000.00 Costs included in overhead: Computer time 750,000 Secreterial cost 700,000 Photocpoying 250,000 Fringe benefits to direct labor 800,000 Phone call time with clients 500,000 Total 3,000,000 1. Overhead application rate based on last year's data (Tot. overhead cost/Dir. labor) = 2. Suppose the direct costs 3,000,000 would be instead of overhead... Last year's cost Direct labor Direct cost Overhead Overhead application rate as a percentage of direct labor would be ... (7 mill./5mill.) = Overhead application rate as a percentage of direct cost would be... (3 mill./5mill.) = 200% 5,000,000.00 3,000,000.00 7,000,000.00 15,000,000.00 140.0% 60% 3. Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank. As per the first rate computed: Direct labor Overhead Eagledale company 15,000 30,000 45,000 First Valley company 15,000 30,000 45,000 Eagledale First Valley As per the second rate computed: Direct labor Direct cost Overhead company 15,000 10,000 21,000 46,000 company 15,000 6,000 21,000 42,000 Eagledale company 15,000 10,000 13,125 38,125 First Valley company 15,000 6,000 13,125 34,125 As per the third rate computed: Direct labor Direct cost Overhead Last years cost Direct labor Overhead 5,000,000.00 10,000,000.00 15,000,000.00 Costs included in overhead Computer time Secreterial cost Photocpoying Fringe benefits to direct labor Phone call time with clients 750000 700000 250000 800000 500000 3000000 1 Overhead appilcation rate based on last years data 2 Suppose the cost 3000,000 would be regarded as direct cost it will Last years cost Direct labor Direct cost Overhead Overhead appilcation rate as a percentage of direct labor would be Overhead appilcation rate as a percentage of direct cost would be 200% 5,000,000.00 3,000,000.00 7,000,000.00 15,000,000.00 140.0% 87.5% \f13-52 Choice of the Cost-Allocation Bases in Accounting Firm Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is considering the desirability of tracing more costs to jobs than just direct labor. In this way, the firm will be able to justify billings to clients. Last year's costs were as follow: Direct-professional labor $ 5,000,000 Overhead 10,000,000 Total costs $15,000,000 The following costs were included in overhead: Computer time $ 750,000 Secretarial cost 700,000 Photocopying 250,000 Fringe benefits to direct labor 800,000 Phone call time with clients (est-ed but not tabulated) 500,000 Total $3,000,000 The firm's data processing techniques now make it feasible to document and trace these costs to individual jobs. As an experiment, in December Brenda McCoy arranged to trace these costs to six audit engagements. Two job records showed the following: Engagement Eagledale Company First Valley Bank Direct-professional labor $15,000 $15,000 Fringe benefits to direct labor 3,000 3,000 Phone call time with clients 1,500 500 Computer time 3,000 700 Secretarial costs 2,000 1,500 Photocopying 500 300 Total direct costs $25,000 $21,000 1. Compute the overhead application rate based on last year's costs. 2. Suppose last year's costs were reclassified so that $3 million would be regarded as direct costs instead of overhead. Compute the overhead application rate as a percentage of direct labor and as a percentage of total direct costs. 3. Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank. 4. Suppose that client billing was based on a 30% markup of total job costs. Compute the billings that would be forthcoming in number 3. 5. Which method of costing and overhead application do you favor? Explain. Last year's costs: Direct labor 5,000,000.00 Overhead 10,000,000.00 Total costs 15,000,000.00 Costs included in overhead: Computer time 750,000 Secreterial cost 700,000 Photocpoying 250,000 Fringe benefits to direct labor 800,000 Phone call time with clients 500,000 Total 3,000,000 1. Overhead application rate based on last year's data (Tot. overhead cost/Dir. labor) = 2. Suppose the direct costs 3,000,000 would be instead of overhead... Last year's cost Direct labor Direct cost Overhead Overhead application rate as a percentage of direct labor would be ... (7 mill./5mill.) = Overhead application rate as a percentage of direct cost would be... (3 mill./5mill.) = 200% 5,000,000.00 3,000,000.00 7,000,000.00 15,000,000.00 140.0% 60% 3. Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank. As per the first rate computed: Direct labor Overhead Eagledale company 15,000 30,000 45,000 First Valley company 15,000 30,000 45,000 Eagledale First Valley As per the second rate computed: Direct labor Direct cost Overhead company 15,000 10,000 21,000 46,000 company 15,000 6,000 21,000 42,000 Eagledale company 15,000 10,000 13,125 38,125 First Valley company 15,000 6,000 13,125 34,125 As per the third rate computed: Direct labor Direct cost Overhead Last years cost Direct labor Overhead 5,000,000.00 10,000,000.00 15,000,000.00 Costs included in overhead Computer time Secreterial cost Photocpoying Fringe benefits to direct labor Phone call time with clients 750000 700000 250000 800000 500000 3000000 1 Overhead appilcation rate based on last years data 2 Suppose the cost 3000,000 would be regarded as direct cost it will Last years cost Direct labor Direct cost Overhead Overhead appilcation rate as a percentage of direct labor would be Overhead appilcation rate as a percentage of direct cost would be 200% 5,000,000.00 3,000,000.00 7,000,000.00 15,000,000.00 140.0% 87.5%