Chapter 17: ABC for Service Providers

To allocate overhead costs for a service company like Data Pro using ActivityBased Costing (ABC), we will follow the same three-step process as outlined previously. In this case, we'll use the data provided for the forensic accounting department. Step 1: Identify Activities and Their Budgeted Overhead Costs First, we will identify the activities, their budgeted costs, activity cost drivers, and budgeted activity usage. Here's an example setup based on common activities in a forensic accounting department: Activity Budgeted Cost Activity Driver Budgeted Activity Usage Case Management $300,000 Number of Jobs 20 jobs Client Consultation $150,000 Consultation Hours 200 hours Reporting $100,000 Number of Reports 20 reports Facility Maintenance $50,000 Square Feet of Office Space 1,000 sq. ft. Step 2: Compute Overhead Activity Rate for Each Activity The activity rate is calculated using the formula: Activity Rate=Budgeted Overhead Cost Budgeted Activity Level Calculating the activity rate for each activity: 1. Case Management: Activity Rate=300,00020=15,000 per job 2. Client Consultation: Activity Rate=150,000200=750 per hour 3. Reporting: Activity Rate=100,00020=5,000 per report 4. Facility Maintenance: Activity Rate=50,0001,000=50 per sq. ft. Step 3: Allocate Overhead Cost to Cost Objects Now, we'll use actual activity usage to allocate overhead costs to the forensic accounting jobs. Let’s assume that in addition to the budgeted 20 jobs, the actual usage for the jobs completed in the forensic accounting department was as follows: • • • • Case Management: 20 jobs completed Client Consultation: 180 hours used Reporting: 20 reports created Facility Maintenance: 1,000 sq. ft. occupied Calculating Overhead Allocated 1. Case Management Costs: Allocated Cost=20 jobs×15,000=300,000 2. Client Consultation Costs: Allocated Cost=180 hours×750=135,000 3. Reporting Costs: Allocated Cost=20 reports×5,000=100,000 4. Facility Maintenance Costs: Allocated Cost=1,000 sq. ft.×50=50,000 Total Overhead Allocated Now, summing all the allocated costs: Total Overhead Allocated=300,000+135,000+100,000+50,000=585,000 Overhead Cost Per Unit (Job) To find the overhead cost per job, we divide the total overhead allocated by the number of jobs completed: Overhead Cost per Job=585,00020=29,250 Summary of Results 1. Activity Rates: o Case Management: $15,000 per job o Client Consultation: $750 per hour o Reporting: $5,000 per report o Facility Maintenance: $50 per sq. ft. 2. Total Overhead Allocated: $585,000 3. Overhead Cost per Job: $29,250 Conclusion Using Activity-Based Costing allows Data Pro to allocate overhead costs based on the actual activities that drive those costs. This method provides more accurate cost information, which is crucial for pricing and profitability decisions in the forensic accounting department. If you need further assistance or want to explore more about ABC, feel free to ask!