A&R Quality Advisors is a small consulting 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, A&R 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 $60 for staff and $150 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. A&R employs 10 staff and two managers. In addition to staff and manager costs, A&R has overhead and administrative costs of $4,500,000, of which about $1,500,000 is variable with respect to billable hours. Overhead and administrative costs include the nonbillable cost of the staff and managers. Selected information on billable hours expected for the next year follows: Billable Audit Hours Billable Advising Hours Total Billable Hours Staff Manager Staff Manager Staff Manager Client 01 150 12 200 10 350 22 Client 02 70 10 0 0 70 10 Client 03 220 30 80 15 300 45 ⋮ ⋮ ⋮ ⋮ ⋮ ⋮ ⋮ Client 49 40 2 0 0 40 2 Client 50 300 20 200 15 500 35 Total 8,500 1,200 9,500 800 18,000 2,000 Although not all clients use A&R for both services, about 70 percent do. A&R 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 $200 per hour, and manager rates are $500 per hour. The rates are set to meet the competition in the area. To determine the cost (not the price) of the job, A&R 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 expected billable hours. Total revenue at A&R next year is expected to be $8 million. The two founding partners of A&R 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.” Required: What is the predetermined overhead rate for costing jobs in the following year? How much will Client 02 be billed for audit services next year? How much will the job costing system report as the cost of Client 02 audit services next year? What will be the total revenues from audit services next year based on the expected hours and the billing rates? Based on the job costing system, what will the reported cost of audit services be next year? Based on the job costing system, what will be the cost of advisory services? What is the expected profit of audit services next year? What is the expected profit of advisory services next year?
A&R Quality Advisors is a small consulting 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, A&R 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 $60 for staff and $150 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. A&R employs 10 staff and two managers.
In addition to staff and manager costs, A&R has
Selected information on billable hours expected for the next year follows:
| Billable Audit Hours | Billable Advising Hours | Total Billable Hours | ||||
|---|---|---|---|---|---|---|
| Staff | Manager | Staff | Manager | Staff | Manager | |
| Client 01 | 150 | 12 | 200 | 10 | 350 | 22 |
| Client 02 | 70 | 10 | 0 | 0 | 70 | 10 |
| Client 03 | 220 | 30 | 80 | 15 | 300 | 45 |
| ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ |
| Client 49 | 40 | 2 | 0 | 0 | 40 | 2 |
| Client 50 | 300 | 20 | 200 | 15 | 500 | 35 |
| Total | 8,500 | 1,200 | 9,500 | 800 | 18,000 | 2,000 |
Although not all clients use A&R for both services, about 70 percent do.
A&R 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 $200 per hour, and manager rates are $500 per hour. The rates are set to meet the competition in the area.
To determine the cost (not the price) of the job, A&R uses a
Total revenue at A&R next year is expected to be $8 million.
The two founding partners of A&R are looking at these
Required:
-
What is the predetermined overhead rate for costing jobs in the following year?
-
How much will Client 02 be billed for audit services next year?
-
How much will the job costing system report as the cost of Client 02 audit services next year?
-
What will be the total revenues from audit services next year based on the expected hours and the billing rates?
-
Based on the job costing system, what will the reported cost of audit services be next year?
-
Based on the job costing system, what will be the cost of advisory services?
-
What is the expected profit of audit services next year?
-
What is the expected profit of advisory services next year?
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