AQ Ltd is an architectural firm that provides professional services to clients including

construction and designs. The firm's costing system includes only labor and overhead

costs. Labor costs are allocated to projects on the basis of labor hours. Labor costs

consist of building design and customer service costs. The allocation base of overheads

to projects is total labor hours worked. AQ Ltd only has two projects: SHKE and CKLQ.

In order to better evaluate the profitability of each project, the firm is considering

implementation of an activity based costing (ABC) system to allocate overheads. AQ

Ltd identified the following overhead activities, cost drivers and budgets:

Activities Cost Driver Budgeted Total Activity

for the Year

Planning Number of planning

meetings

1,000 meetings

Site investigation Number of site visits 100 visits

Building designs Number of construction

labor hours

1,000 hours

Customer services Number of customer

service labor hours

1,500 hours

Construction administration

and furnishing

Number of work order 200 orders

The following are data relating to budgeted cost of AQ:

Planning $600,000

Site investigation $1000,000

Building designs $2000,000

Customer services $500,000

Construction administration

and furnishing

$700,000

The following are actual data relating to two projects completed by AQ:

SHKE CKLQ

Contract service fees $5,000,000 $3,000,000

Number of planning meeting 60 meetings 80 meetings

Number of site visit 8 visits 28 visits

Number of construction labor

hour

800 hours 500 hours

Number of customer service

labor hour

300 hours 600 hours

Number of work order 30 orders 200 orders

Required:

(a) Compute the total cost of the two projects: SHKE and CKLQ, using:

(i) The existing costing system adopted by AQ

(ii) Activity based costing

(b) Comment on the profitability of the two projects using existing costing

system and activity based costing.

(c) Suggest how AQ Ltd can reduce the overhead cost.

(d) The accountant at AQ stated that "the existing costing method and ABC

method used by AQ do not affect its pricing decisions".

Comment on the statement above.