ABM and ABC in a Service Business
MUF, a CPA firm, has provided audit and tax services to businesses in the London area for over 50 years. Recently, the firm decided to use ABM and activity-based costing to assign its overhead costs to those service functions. Gemma Fior, the company’s controller, is interested in seeing how the change from the traditional to the activity-based costing approach affects the average cost per audit job. The following information has been provided to assist in the comparison:
|
Total direct labor costs |
£400,000 |
|
Other direct costs |
120,000 |
|
Total direct costs |
£520,000 |
The traditional costing approach assigned overhead costs at a rate of 120 percent of direct labor costs.
Data for activity-based costing of the audit function are as follows:
|
Activity |
Cost Driver |
Activity Cost Rate |
Activity Usage |
|
Professional |
Number of |
£2,000 per |
50 employees |
|
development |
employees |
employee |
|
|
Administration |
Number of jobs |
£1,000 per job |
50 jobs |
|
Client |
Number of new |
£5,000 per new |
29 new clients |
|
development |
clients |
client |
1. Using direct labor cost as the cost driver, calculate the total costs for the audit function. What is the average cost per job?
2. Using activity-based costing to assign overhead, calculate the total costs for the audit function. What is the average cost per job?
3. Calculate the difference in total costs between the two approaches. Why would activity-based costing be the better approach for assigning over head to the audit function?
4. Your instructor will divide the class into groups to work through the case. One student from each group should present the group’s findings to the class.