CASE I: COSTING BUSINESS CONSULTING

Table 1: Budgeted Activity Data (Annual)

Jobs

A2
A1

W. Hours
T. Hours
Total
# Visits

B1
5

00
120
620
100

600

900

Total
2000

220
820
150

280
1180
80

620
2620
330

W. Hours = Work hours to serve customers at their premises and from the central office
T. Hours = Hours traveled to customer premises
# Visits = Number of visits to customer premises
Your budgeted office, utilities, systems equipment and travel costs are given in Table 2
below:
TABLE 2: BUDGETED OFFICE, UTILITIES, SYSTEMS, EQIPMENT & TRAVEL COSTS

Office space (Rent):

Electricity:
Systems:
Telecommunications:
Equipment (Leased):
Travel Costs:
Total Costs:

$2,000 (Monthly)
$ 600 (Monthly)
$ 800 (Monthly)
$ 700 (Monthly)
$ 400 (Monthly)
$ 500 (Monthly)
$5,000 (Monthly) 12 months = $60,000 (Annual)

You decide not to pay yourself a salary for the work you do for your company. You
estimate that, in addition to your own business, other companies are very likely to hire
you to be their AIS consultant at a compensation rate of $100 per hour for as many hours
as you wish to work.
After careful analysis, you decide to assign and allocate costs to jobs by the total number
of hours worked and traveled.
Case Requirements:
1. Explain why, in costing jobs, total hours worked and traveled is a more suitable
cost driver than job visits to customers.

In costing jobs, it is suitable to use hours worked and traveled. Job visits to customers
will not take into account the job done in the office. Also, number of visits could differ in
the number of hours worked at a customers premise. Less or more hours could be
worked on a particular visit and number of visits will not take that into account.
2. Which costs you would assign to the jobs as direct costs, and which costs you
would allocate to the jobs as indirect costs?
Hours worked and traveled can be directly traced to job A1, A2 and B1. Therefore, they
can be assigned as direct costs. On the contrary, Office space, electricity, systems, travel
costs, equipment as well as telecommunications would be considered as indirect costs
because these costs will be difficult to allocate to each job.
3. Estimate the budgeted accounting-oriented costs for jobs A1, A2, and B.
Total Budgeted Hours- 2000 hours worked + 620 hours traveled=2620 hours
Accounting-oriented approach
Monthly
Yearly
$2,000
$24,000
600
$7,200
800
$9,600
700
$8,400
$4,800
400
$5,200
$59,200

Indirect costs
Office space (Rent):
Electricity:
Systems:
Telecommunications:
Equipment (Leased):
Travel Costs*
Total Indirect Costs

*Amount obtained from the lecture 1 slides

Budgeted Rate- 59,200/2620= $22.60
Jobs

Total Hours

Cost per
hour

A1

620

22.60

A2

820

22.60

B1

1180

22.60

Total

2620

22.60

Total
Cost
$14,01
2.00
$18,53
2.00
$26,66
8.00
$59,212.
00

4. Estimate the budgeted economic-oriented costs for jobs A1, A2, and B1.
Economic-Oriented Costs
Economic-oriented
Indirect costs
approach
Office space (Rent):
$2,000
$24,000
Electricity:
600
$7,200
Systems:
800
$9,600
Telecommunications:
700
$8,400
Labor
$262,000
$4,800
Equipment (Leased):
400
Travel Costs*
$7,450
Total Indirect Costs
$323,450
*Amount obtained from the lecture 1 slides
Labor in this case is the opportunity cost of not being an AIS consultant for other
companies - $100 per hour *2620 budgeted hours = $262,000.
Budgeted rate 323450/2620=$123.45
Jobs

Total
Hours

Cost per
hour

A1

620

123.45

A2

820

123.45

B1

1180

123.45

Total

2620

123.45

Total Cost
$76,539.0
0
$101,229.
00
$145,671.
00
$323,439.0
0

5. How would your estimates in requirements 3 and 4 above change if you decide to
pay yourself a salary of $100 per hour worked and travelled?
Economic oriented analysis will not change because the $100 per hour worked
has already been incorporated in the cost of labor but in the accounting-oriented,
approach, 262,000 (2620*$100) of labor cost will be added to the total indirect
costs. Calculations would be as follows:
Indirect costs

Accounting-oriented

Office space (Rent):

Electricity:
Systems:
Labor
Telecommunications
:
Equipment
(Leased):
Travel Costs*
Total Indirect Costs

approach
$2,000
600
800

$24,000
$7,200
$9,600
$262,000

700
400

$8,400
$4,800
$5,200
$321,200

Budgeted rate $321,200/2620=$122.60

Jobs
A1
A2
B1
Total

Cost per
Total Hours
hour
620
122.60
820
122.60
1180
122.60
2620
122.60

Total Costs
76012.00
100532.00
144668.00
321212.00

6. Which cost estimates would you use for billing your customers and assessing their
profitability: estimates based on accounting-oriented costs, or estimates based on
economic-oriented costs?
Estimates based on economic-oriented costs would be the appropriate choice
because it incorporates opportunity costs in its calculations whereas the
accounting-oriented approach does not. This essentially means that in the
accounting-oriented approach, the projected cost of the jobs would be understated
which will consequently overstate the profitability of the jobs.
7. In bidding for the jobs, if you decide to price the jobs at a 30% profit margin
above total allocated budgeted costs, estimate the expected prices and profits for
all jobs based on economic costs.
Based on economic costs, calculations are as follows:
Jobs
A1
A2

Cost
$76,539.00
$101,229.00

Profit
Margin

Profit
Price
$22,961.7 $99,500.
0.3
0
70
0.3 $30,368.7
$131,59

B1

$145,671.00

0.3

0
$43,701.3
0

7.70
$189,37
2.30

8. Explain why, in the process of pricing jobs and assessing their expected
profitability, you often need to rely on budgeted (estimated) figures, to be
reconciled later with actual figures.
Budgeting has to be done to spread and allocate the indirect costs to cost objects.
Predetermining the costs involved in jobs also gives you an idea of the
profitability of a particular job. Afterwards, compare the actual costs of the jobs to
the budgeted figures as they become available