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Eisner & Associates: Income Statement and Activity Based Costing

Eisner & Associates provides consulting and tax preparations services to its clients. It charges a $200 fee per hour for each service. The firm's revenues and overhead costs for the year are shown in the following statement:
Tax Consulting Total
Revenue $260,000 $540,000 $800,000
Overhead Costs
Secretarial support _______ _______ $160,000
Supplies _______ _______ 80,000
Computer costs, ect _______ _______ 60,000
Profit before direct labor costs _______ _______ $500,000
The firm uses ABC and the following cost drivers:
Activity Level
Overhead Cost Cost-Driver Base Tax preparation Consulting
Secretarial Support Number of clients 72 48
Supplies Transactions with clients 200 300
Computer costs, etc Computer hours 1,000 600

a. Complete the income statement using activity-based costing and the firm's three cost drivers.
b. Recompute the income statement using direct-labor hours as the only allocation base: 1,300 hours for tax; 2,700 hours for consulting.
c. How might the firm's decisions be altered if it were to allocate all overhead costs using direct-labor hours?
d. Under what circumstances would be labor-based allocation and activity-based costing (using the three cost drivers) result in similar profit results?
e. Build an Excel spreadsheet to solve requirements (a) and (b).

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Solution Preview

Please see the attached file for the answers to parts a and b.

C.       How might the firm's decisions be altered if it were to allocate all overhead costs using direct-labor hours?
If all overhead costs are allocated on the basis of direct labor hours, then the firm ...

Solution Summary

The Solution provides a completed income statement for Eisner & Associates using both activity based costing and with direct labor hours as the allocation base.

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