Activity Based versus Traditional Costing—Ethical Issues
Wendy Chen established Windy City Coaching (WCC) to provide teen counseling and executive coaching services to its clients. WCC charges a $300 fee per hour for each service. The revenues and costs for the year are shown in the following income statement:
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WINDY CITY COACHING |
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Income Statement |
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Teen |
Executive |
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|
|
Counseling |
Coaching |
Total |
|
Revenue |
$66,000 |
$135,000 |
$201,000 |
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Expenses: |
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|
|
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Administrative support |
|
|
40,000 |
|
Transportation, etc |
|
|
36,000 |
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Equipment |
|
|
20,000 |
|
Profit |
|
|
$105,000 |
WCC has kept good records of the following data for cost allocation purposes:
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Activity Level |
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Activity |
Cost Driver |
Teen |
Executive |
|
Providing administrative support |
Number of clients |
Counseling |
Coaching |
|
Traveling |
Number of visits |
6 |
4 |
|
Using equipment |
Computer hours |
100 |
150 |
|
900 |
700 |
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Required
a. Complete the income statement using activity based costing and WCC’s three cost drivers.
b. Recompute the income statement using direct labor hours as the only allocation base (220 hours for teen counseling; 450 hours for executive coaching).
c. How might WCC’s decisions regarding pricing or dropping a service be altered if Wendy were to allocate all overhead costs using direct labor hours?
d. Under what circumstances would the labor based allocation and activity based costing (using Wendy’s three cost drivers) result in similar profit t results?
e. A local nonprofit t charity is looking for worthy causes to support through financial grants. A primary criterion for support is financial need. Wendy is thinking of applying for support for the teen counseling program. Which allocation method would give her the best chance of winning a grant? Would it be ethical for Wendy to report the income using this method in her application?