Question

The Wilmer Group (WG) provides tax advice to multinational firms. WG charges clients for

(a) direct professional time (at an hourly rate) and
(b) support services (at 30% of the direct professional costs billed). The three professionals in WG and their rates per professional hour are as follows.
Professional
Billing Rate per Hour
Mark Wilmer
$500
Ashley Bennet
170
John Amesbury
70
The hours of professional time spent on each client are as follows:
Hours per Client
Professional
San Antonio Dominion
Amsterdam Enterprises
Wilmer
21
3
Bennet
4
11
Amesbury
30
41
Total
55
55
1. What amounts did WG bill to San Antonio Dominion and Amsterdam Enterprises for May 2013?
2. Suppose support services were billed at $55 per professional labor-hour (instead of 30% of professional labor costs). How would this change affect the amounts WG billed to the two clients for May 2013? Comment on the differences between the amounts billed in requirements 1 and 2.
3. How would you determine whether professional labor costs or professional labor-hours is the more appropriate allocation base for WG's support services?
Check : Determine the formula needed to calculate the total cost per professional for each client when WG allocates support costs at 30% of direct professional costs.

Answer 1

NUMBER 1

(A) For San Antonio Dominion,

Total Bill = $17,264

(B) For Amsterdam Enterprises,

Total Bill = $8,112

NUMBER 2

(A) San Antonio Dominion - $16,305

(B) Amsterdam Enterprises - $9,265

NUMBER 3

How to determine the more appropriate S.S. allocation base, between

- Professional Labour Cost

- Professional Labour Hours

The more appropriate allocation base will consider both

- Profit made by WG

- Allocation Base that will keep both clients (or the most clients).

NUMBER 4

Determine the formula needed to calculate the total cost per professional for each client when WG allocates support costs at 30% of direct professional costs.

This is simply the formula used in Requirement 1. Total Cost per professional per client, for Requirement 1 is:

(Hourly rate/cost for Mark Wilmer × Number of hours spent on each client) + (Hourly rate for Ashley Bennet × number of hours spent on each client) + (Hourly rate for John Amesbury × number of hours spent on each client) + 30% of the above sum.

Step-by-step explanation:

NUMBER 1

(A) SAN ANTONIO DOMINION

Direct Professional Time Cost:

(21×500) + (4×170) + (30×70) = 10,500 + 680 + 2100 = $13,280

Support Services:

30/100 × 13,280 = $3,984

Total Bill:

13,280 + 3,984 = $17,264

(B) AMSTERDAM ENTERPRISES

Direct Professional Time Cost:

(3×500) + (11×170) + (41×70) = 1500 + 1870 + 2870 = $6,240

Support Services:

30/100 × 6,240 = $1,872

Total Bill:

6240 + 1872 = $8,112

NUMBER 2

(A) SAN ANTONIO DOMINION

Support Services:

$55/hour × 55hours = $3,025

Total Bill:

13,280 + 3,025 = $16,305

(B) AMSTERDAM ENTERPRISES

Support Services:

$55/hour × 55hours = $3,025

Total Bill:

6,240 + 3,025 = $9,265

NUMBER 3

Looking at the SS (Support Services) formula that fetches more profit for WG,

Requirement 1

Total profit: 17,264 + 8,112 = $25,376

Requirement 2

Total profit: 16,305 + 9,265 = $25,570

Formula 2 earns WG more profit but since the difference in not much, WG can retain formula 1, in order to help Amsterdam Enterprises.

KUDOS!