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Ericsson suspects that her allocation of indirect costs could be giving misleading results so she decides to develop an ABC system. She identifies three?activities: documentation?preparation, information technology?support, and training. Ericson figures that documentation costs are driven by the number of?pages, information technology support costs are driven by the number of software applications?used, and training costs are most closely associated with the number of direct labor hours worked. Estimates of the costs and quantities of the allocation bases?follow:

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?Durgin Inc. is a technology consulting firm focused on website development and integration of internet business applications. President Driscilla Ericson?'s ear is ringing after an unpleasant call from client Jackson Gabriel. Gabriel was irate after opening his bill for Durgin's redesign of his?company's website. Gabriel said that Durgin?'s major?competitor, BetaApplications?, charged much lower fees to another company for which Gabriel serves on the board of directors.

???Ericson is puzzled for two reasons.?First, she is confident that her firm knows website design and support as well as any of Durgin's competitors. Ericson cannot understand how BetaApplications can undercut Durgin's rates and still make a profit. But BetaApplications is reputed to be very profitable.?Second, just yesterday Ericson received a call from client Keith Gregg. Gregg was happy with the excellent service and reasonable fees Ericson charged him for adding a?database-driven job-posting feature to his?company's website. Ericson was surprised by Gregg's compliments because this was an unusual job for Durgin that required development of complex database management and control?applications, and she had felt a little uneasy accepting it.

???Like most consulting?firms, Durgin traces direct labour to individual engagements?(jobs). Durgin allocated indirect costs to engagements using a budgeted rate based on direct labour hours. Ericson is happy with this?system, which she has used since she established Durgin in 1996.

???Ericson expects to incur $747,000 of indirect costs this?year, and she expects her firm to work 5,000 direct labour hours. Ericson and the other systems consultants earn $365 per hour. Clients are billed at 175?% of direct labour cost. Last?month, Durgin's consultants spent 120 hours on Gabriel's engagement. They also spent 120 hours on Gregg's engagement.