A1 Consulting Services (A1CS) provides various types of consulting services throughout Fiji. It uses job costing system to accumulate the cost of client projects.
Traceable costs are charged directly to individual clients.
Other costs incurred by A1CS, but not identifiable with specific clients, are charged to jobs by
using a predetermined overhead rate.
Clients are billed for directly chargeable costs, overhead and a markup for the profit margin.
The following costs have been anticipated for the coming year:
Cost Percentage of cost directly
traceable to clients
Professional staff salaries $3 000 000 85%
Administrative support staff 800 000 60%
Travel 400 000 80%
Photocopying 90 000 90%
Other operating costs 200 000 75%
Total $4 490 000. A1CS’s management wishes to make a profit of $1 250 000 for the firm and plans to add
percentage markup on total cost to achieve that figure.
On 23 May, A1CS completed work on a project for Mango Manufacturing. The following costs
were incurred:
Cost
Professional staff salaries $55 000
Administrative support staff 5 000
Travel 6 000
Photocopying 1 200
Other operating costs 2 800
Note: If rounding off is required, round off your figures to 2 d. p.
Required:
1. Determine A1CS’s total traceable costs for the coming year and the firm’s total
anticipated overhead. (4 marks)
2. Calculate the predetermined overhead rate, assuming the cost driver is traceable costs.
(3 marks)
3. What percentage of cost will A1CS add to each job to achieve its profit target? (3 marks)
4. Determine the total cost of the Mango Manufacturing project. (5 marks)
5. How much Mango Manufacturing would be billed for the services performed? (5 marks)
6. Compare the approach used in requirement 5 with client billing system described in
Topic 8. (4 marks)
7. Only 75 per cent of A1CS’s other operating cost is directly traceable to specific client
projects. Identify three costs that would be included in other operating costs and would
be difficult to trace to clients. (3 marks)
8. 85 per cent of the professional staff cost is directly traceable to specific client projects.
Give two reasons that would explain why this figure isn’t 100 per cent. (3 marks)​

A1 Consulting Services (A1CS)

1. A1CS's total traceable costs for the coming year = $3,581,000 and

Total anticipated overhead = $909,000

2. Predetermined overhead rate = $0.254 per traceable cost.

3. The percentage of cost that A1CS will add to each job to achieve its profit target is:

= 27.8%

4. The total cost of the Mano Manufacturing project is:

= $87,780

5. Mango Manufacturing would be billed $112,183.

6. The approach in requirement 5 is the markup approach, which is based on a percentage added to the total costs.  It is different from a margin approach, which adds a percentage of the selling price to the total costs.

7. Other operating costs may include Supervisor's salaries, Equipment depreciation expenses, and Factory property taxes.

8. There may be other professional staff who work on the general projects, whose costs cannot be directly traceable to specific client projects.

Some costs incurred under professional staff may be indirect costs, for example, training of professional staff.

Explanation:

a) Data and Calculations:

                                          Cost       Percentage of cost directly

                                                               traceable to clients

Professional staff salaries $3 000 000      85%    $2,550,000 ($3m*85%)

Administrative support staff   800 000      60%          480,000 ($.8m*60%)

Travel                                       400 000      80%          320,000 ($.4m*80%)

Photocopying                            90 000      90%              81,000 ($90,000*90%)

Other operating costs            200 000      75%           150,000 ($0.2m*75%)

Total                                   $4 490 000

Total traceable costs                                               $3,581,000

Total anticipated overhead = $909,000 ($4,490,000 - $3,581,000)

Predetermined overhead rate = $909,000/$3,581,000 = $0.254

Target profit = $1,250,000

Percentage of cost to add to achieve target profit = 27.8% ($1,250,000/$4,490,000 * 100)

Costs incurred for a project for Mango Manufacturing:

Professional staff salaries $55 000

Administrative support staff 5 000

Travel                                     6 000

Photocopying                         1 200

Other operating costs          2 800

Total traceable costs       $70,000

Overhead costs ($0.254)   17,780

Total costs =                     $87,780

Markup (27.8%)  =              24,403

Total billing for services  $112,183