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For the past five years, Collins Ltd. has been running a consulting practice in which it provides two major services: general management consulting and executive

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For the past five years, Collins Ltd. has been running a consulting practice in which it provides two major services: general management consulting and executive training seminars. The CFO is not quite sure that he is charging accurate fees for the different services Collins provides. He has recently read an article about activity-based costing that convinced him he could use ABC to improve the accuracy of his costing. He has gathered the following selected information concerning the consulting practice during the previous year: Overhead Activities Cost Pools Activities Cost Drivers Planning and review $ 900,000 100,000 hours Billable hours Research 148,000 400 journals Journals purchased General administration 1,740,000 600 clients Number of clients Building and equipment 348,000 2,400 square metres Square metres occupied Clerical 300,000 30 professionals Professional staff $ 3,436,000 In addition, the CFO gathered the following statistics for the two types of services provided to clients during the year: Management Consulting Executive Training Direct labour costs $1,755,000 $875,000 Billable hours 65,000 35,000 Journals purchased 270 130 Number of clients 240 360 Square metres 1,570 830 Professional staff 20 10 Required: a. In the past, the CFO took the total overhead costs and divided them by the total billable hours to determine an average rate. To this amount he would then add the direct labour costs per hour and double this total amount to establish his average hourly charge-out rate. What was the CFO's average hourly charge-out rate using this method? (4 marks) Using ABC, what would the CFO's charge-out rate be? Note that he will continue to add the overhead to the direct labour costs per hour on a service basis and then double this amount to set an average hourly charge-out rate. (6 marks)

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