group Activity: ABM and ABC in a Service Business

C1. MUF, a Chartered Accounting firm, has provided audit and tax services to busi- nesses in the London area for over 50 years. Recently, the firm decided to use ABM and activity-based costing to assign its overhead costs to those service functions. Ginny Fior is interested in seeing how the change from the traditional to the activity-based costing approach affects the average cost per audit job. The following information has been provided to assist in the comparison:

 

 

Total direct labor costs	£400,000
Other direct costs	  120,000
Total direct costs	£520,000

The traditional costing approach assigned overhead costs at a rate of 120 percent of direct labor costs.

Data for activity-based costing of the audit function follow.

 

Activity	Cost Driver	Activity Cost rate	Activity Usage
Professional development	Number of employees	£2,000 per employee	50 employees
Administration	Number of jobs	£1,000 per job	50 jobs
Client development	Number of new clients	£5,000 per new client	29 new clients

 

 

 

 

 

 

 

 

 

 

 

 

Your instructor will divide the class into groups to work through the case. One stu- dent from each group should present the group’s findings to the class.

1.    Using traditional costing and direct labor cost as the cost driver, calculate the total costs for the audit function. What is the average cost per job?

2.    Using activity-based costing to assign overhead, calculate the total costs for the audit function. What is the average cost per job?

3.    Calculate the difference in total costs between the two approaches. Why would activity- based costing be the better approach for assigning overhead to the audit function?