J.C. & Associates provides consulting and tax preparation services to its clients. It charges a $100 fee per hour for each service. The firms revenues and costs for the year are shown in the following income statement:

TAX CONSULTING TOTAL

Revenue	$130,000	$270,000	$400,000
Overhead expenses:
Secretarial support			80,000
Supplies			72,000
Computer costs, etc..			40,000
Total expenses			192,000
Profit			$208,000

The firm is considering the use of ABC and the following cost drivers:

Activity Level

Activity Cost Pool	Cost Driver	Tax	Consulting
Secretarial Support	Number of clients	72	48
Supplies	Transactions with clients	200	300
Computer costs	Computer hours	1,000	600

Required:

1) Prepare the income statement using Traditional Costing and allocate the overhead using direct-labor hours as the allocation base: Assume there are 1,300 DLHs for tax and 2,700 DLHs for consulting. Determine the total cost per hour for each service.

2) Prepare the income statement using Activity-Based Costing given the data above. Also, compute the total cost per hour for each service - given hours in (1).

3) Explain the work incentives for the members of the firm given each income statement scenario. For example, what services would you target market to your clients? Why?

4) Based on the analysis, would you maintain the current fee per hour structure or would you revise it? Explain.

5) Under what circumstances would the labor-based allocation and activity-based costing (using the three cost drivers) result in similar profit centers?