Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is considering the desirability of tracing more costs

13-52 Choice of Cost-Allocation Bases in Accounting Firm

Brenda McCoy, the managing partner of McCoy, Brennan, and Cable, a public accounting firm, is considering the desirability of tracing more costs to jobs than just direct labor. In this way, the firm will be able to justify billings to clients.

Last year’s costs were
Direct-professional labor $ 5,000,000
Overhead 10,000,000
Total costs $15,000,000

The following costs were included in overhead:
Computer time $ 750,000
Secretarial cost 700,000
Photocopying 250,000
Fringe benefits to direct labor 800,000
Phone call time with clients (estimated but not tabulated) 500,000
Total $3,000,000

The firm’s data processing techniques now make it feasible to document and trace these costs to individual jobs. As an experiment, in December Brenda McCoy arranged to trace these costs to six audit engagements.

Two job records showed the following:
Engagement
Eagledale Company First Valley Bank
Direct-professional labor $15,000 $15,000
Fringe benefits to direct labor 3,000 3,000
Phone call time with clients 1,500 500
Computer time 3,000 700
Secretarial costs 2,000 1,500
Photocopying 500 300
Total direct costs $25,000 $21,000

1. Compute the overhead application rate based on last year’s costs.
2. Suppose last year’s costs were reclassified so that $3 million would be regarded as direct costs instead of overhead. Compute the overhead application rate as a percentage of direct labor and as a percentage of total direct costs.
3. Using the three rates computed in numbers 1 and 2, compute the total costs of engagements for Eagledale Company and First Valley Bank.
4. Suppose that client billing was based on a 30% markup of total job costs. Compute the billings that would be forthcoming in number 3.
5. Which method of costing and overhead application do you favor? Explain.

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Spencer Electronics has just developed a low-end electronic calendar that it plans to sell via a cable channel marketing program

PROBLEM 8-1. Determining the Profit-Maximizing Price [LO 1] Spencer Electronics has just developed a low-end electronic calendar that it plans to sell via a cable channel marketing program. The cable program's fee for selling the item is 20% of revenue. For this fee, the program will sell the calendar over six 10-minute segments in September.

Spencer's fixed costs of producing the calendar are $150,000 per production run. The company plans to wait for all orders to come in, then it will produce exactly the number of units ordered. Production time will be less than three weeks. Variable production costs are $25.00 per unit. In addition, it will cost approximately $5.00 per unit to ship the calendars to customers.

Marsha Andersen, a product manager at Spencer, is charged with recommending a price for the item. Based on her experience with similar items, focus group responses, and survey information, she has estimated the number of units that can be sold at various prices:

Price: Quantity:
$79.99 15,000
$69.99 20,000
$59.99 30,000
$49.99 45,000
$39.99 65,000

Required:
a) Calculate expected profit for each price.
b) Which price maximizes company profit.

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