Case Background:
BBP,LLC Quality Advisors is a small accounting firm offering quality audits and advising services to small and mid-sized manufacturing firms. Quality audits entail reviewing, checking, and documenting quality practices within a firm. Quality advising entails making recommendations for new or revised quality practices. Other firms in the area offer one or both of these services, although the competition for quality audit jobs is stronger than for quality advising.
In addition to senior executives, BBP,LLC employees are either staff or managers. Staff employees are usually younger with less experience. Managers, who oversee the staff on jobs, are more experienced. The average hourly wage is $220 for staff and $550 for managers. (Both staff and managers are paid an annual salary; these hourly costs are based on 2,000 average annual hours worked.) Staff are expected to spend at least 90 percent of their time on billable work. Because of administrative work associated with supervising the staff and the expectation that managers will spend a portion of their time seeking new business, managers are expected to spend about 50 percent of their time on billable work. BBP,LLC employs fifteen staff and five managers.
In addition to staff and manager costs, BBP,LLC have estimated that their overhead and administrative costs will be $9,760,000.
BBP,LLC bills audit services based on billable hours and advising services at a fixed fee. The cost for audit services is determined by multiplying the billable hours by the quoted employee rates. Staff rates for the following year are $360 per hour and manager rates are $900 per hour. The rates are set to meet the competition in the area.
Total revenue at BBP,LLC next year is expected to be $16 million.
The two founding partners of BBP,LLC are looking at these forecasts for next year and trying to decide whether to drop one of these services. “We should probably become more focused, as we sometimes remind our clients.”
Information on the billable hours is provided on the following page:
Billable Audit Hours Billable Tax Hours Total Billable Hours
Staff Manager Staff Manager Staff Manager
Client 01 292 65 215 57 507 122
Client 02 314 70 219 58 533 128
Client 03 278 62 209 55 487 118
Client 04 252 56 160 42 412 99
Client 05 272 61 197 52 469 113
Client 06 313 70 185 49 498 119
Client 07 219 49 176 47 395 96
Client 08 314 70 174 46 488 116
Client 09 329 74 128 34 457 107
Client 10 226 50 140 37 366 88
Client 11 362 81 133 35 495 116
Client 12 332 74 225 60 557 134
Client 13 243 54 251 67 494 121
Client 14 248 55 111 29 359 85
Client 15 181 40 138 37 319 77
Client 16 205 46 177 47 382 93
Client 17 337 75 146 39 483 114
Client 18 337 75 168 45 505 120
Client 19 236 53 256 68 492 121
Client 20 309 69 130 34 439 104
Client 21 204 46 193 51 397 97
Client 22 313 70 218 58 531 128
Client 23 233 52 147 39 380 91
Client 24 254 57 218 58 472 115
Client 25 309 69 150 40 459 109
Client 26 319 71 175 46 494 118
Client 27 344 77 113 30 457 107
Client 28 199 44 155 41 354 86
Client 29 369 82 110 29 479 112
Client 30 352 79 248 66 600 144
Client 31 282 63 212 56 494 119
Client 32 355 79 292 77 647 157
Client 33 240 54 204 54 444 108
Client 34 345 77 279 74 624 151
Client 35 278 62 118 31 396 93
Client 36 257 57 169 45 426 102
Client 37 189 42 265 70 454 112
Client 38 317 71 152 40 469 111
Client 39 342 76 214 57 556 133
Client 40 257 57 141 37 398 95
Client 41 264 59 201 53 465 112
Client 42 212 47 208 55 420 103
Client 43 286 64 162 43 448 107
Client 44 261 58 232 62 493 120
Client 45 278 62 105 28 383 90
Client 46 183 41 266 71 449 111
Client 47 254 57 169 45 423 102
Client 48 290 65 149 40 439 104
Client 49 208 46 216 57 424 104
Client 50 242 54 197 52 439 106
Total 13,835 3,091 9,216 2,444 23,051 5,535
Part 1:
To determine the cost (not the price) of the job, BBP,LLC currently uses a job costing system. To the employee costs (not the billing rates) is added an amount for overhead based on the predetermined rate and the billable hours in the job. The predetermined rate is based on total expected billable hours.
Required:
a. What is the predetermined overhead rate for costing jobs in the following year?
b. Provide a cost report breakdown (i.e. total cost recorded for audit and for tax) for Client 02, Client 13, and Client 48.
c. What will be the total revenues from audit services next year based on the expected hours and the billing rates?
d. Based on the job costing system, what will the reported cost of ALL audit services be next year?
e. Based on the job costing system, what will be the cost of ALL tax services?
f. What is the expected profit of audit services next year?
g. What is the expected profit of tax services next year?
Part 2:
Two of the newer partners of BBP,LLC are looking at these forecasts and realize that the tax services they offer are fairly standardized in process and thinks they can be recorded as such. They think the firm should look at recording this in under a Process Costing methodology. They feel there are 2 major processes in which tax returns operate under, a data collection and data entry.
They want to view a process cost system for tracking the costs of the tax services using a weighted-average process costing method. All costs are incurred evenly throughout the process. They have provided the following data about the current clients to assist you:
Data Collection:
Beg WiP 12 Clients
Started During the Year 38 Clients
Completed and Transferred Out 42 Clients
End WiP (85% Complete) 8 Clients
Costs:
Beg WiP $201,066
Incurred During the Year:
Staff Labor 811,008
Manager Labor 268,840 Admin & Overhead 1,244,705
Data Entry:
Beg WiP 0 Clients
Started During the Year 50 Clients
Completed and Transferred Out 46 Clients
End WiP (30% Complete) 4 Clients
Costs:
Beg WiP $ -0-
Incurred During the Year:
Staff Labor 1,216,512
Manager Labor 1,075,360 Admin & Overhead 2,311,595
Required:
a. Based on the process costing system, what will the ending WiP for tax services DATA COLLECTION?
b. Based on the process costing system, total value transferred out of DATA ENTRY?
c. Based on the process costing system, what is the total cost for tax services for Client 13, compare this to the cost provided by the job order system.
d. Would you recommend this system, why or why not? (Provide reasons for or against the process cost system as compared to the job order system for tax services.)
Part 3:
The newest partner thinks that the firm might benefit the most from using Activity Based Costing. They have worked out the major components of the services but need assistance with determining the best options for the process.
The major steps (activities) are as follows:
Client Meeting Staff and Managers meet with the client to discuss the major events and concern the client may have that could possibly impact their taxes for the current year.
File Collection and Storage Staff members collect, scan, and file each individual document turned in from the client.
Research Staff members provide research to tax consequences on new treatments and/or changes in tax law to old treatment of issues to client transactions.
Work Papers Staff members generate work papers for return. Running calculations with supporting documents and correcting any times noted during the review process.
Review Managers review the work papers for accuracy and submit any changes.
Data Entry Staff members generate the final tax return and submit it to the taxing authorities.
Exit Meeting Staff and Managers meet with the client to discuss the return and any outstanding issues as well as pending items for the next year.
Required
a. Provide a list of potential cost drivers for each of these activities (the same driver can be reused).
b. Provide the reason on WHY this is an appropriate cost driver for the activity as well as how the firm would be able to estimate it (i.e. if you used pounds of materials the firm would need to know how many pounds are in the average unit and how many units they expect to make to generate a total estimated pounds.)
c. Does the use of ABC seem like a good idea for this product line? Why or why not?
