Professional Documents
Culture Documents
MBA6035 TakeHomeExam3 Nov 1 2021
MBA6035 TakeHomeExam3 Nov 1 2021
The following industry facts should be kept in mind in thinking about the Kauffman &
Associates case, described below.
2) Every professional employee in a knowledge firm has a “billing rate” designated by the firm.
At the time of a professional engagement, the client agrees to pay the billing rates of each of the
team members that have been assigned to that engagement.
Most billing rates are cost based, and include the employee’s salary, overhead costs and a
markup.
3) Knowledge firm’s would want their accounting system to at least provide information about
the profitability of each client engagement and the kind of information that is needed to
determine billing rates of their professional employees.
Most of the above costs (excluding travel costs) are governed by long term contracts, so there
isn’t much variability in these costs from week to week.
However, travel costs do vary considerably from week to week. Professional staff travel for the
following purposes:
Each year, Kauffman specifies an annual travel budget for professional development activities
which is enforced quite strictly. The budget for the forthcoming year is $500,000. There is no
travel budget for marketing activities, but the annual expenditure is fairly stable, currently
running at $600,000. These amounts do not include the salaries of the professional staff who are
engaged in marketing and professional development. (Note: There are 52 weeks in a year)
Each professional staff member is employed 40 hours per week. Each professional staff
member submits a weekly time report that shows the number of hours worked during the week
on each of his/her client engagements. The time worked on specific client engagements is called
“billable time.” Time not spent on specific client engagements is called “unassigned time.” It is
quite common for professional staff members to have some unassigned time on their time
reports.
Kauffman’s billable time fluctuates erratically from week to week, ranging from 1,000
hours to 1,500 hours. Kauffman has a simple costing scheme. Billable time is traced to
individual clients and costed at that professional staff member’s hourly salary ($150 per hour for
systems analysts and $45 per hour for junior professional staff). Travel costs incurred for
working on specific client engagements are charged to those specific clients. All other costs
(travel and non-travel) are treated as overhead. A single overhead rate is calculated each week
by dividing the observed overhead cost for the week by the total billable time recorded for the
week to obtain an overhead cost per billable hour. This is the rate at which overhead cost is
assigned to each client engagement. For example, if this overhead rate turns out to be $80 per
billable hour in some week, and if client A is served 100 billable hours in that week, then the
accounting system assigns an overhead cost of $8,000 to client A.
Costing of jobs is different from billing of jobs to clients. Kauffman currently bills its
clients at a uniform rate of $300 per hour of billable time, regardless of which professional staff
worked on that job. Additionally Kauffman bills for client specific travel at actually incurred
costs supported by vouchers/receipts. Some clients have been complaining that Kauffman’s
billing rate is too high, and the managing partner of Kauffman feels that their billing rates ought
to be more closely tied to their costs.
An interview with the managing partner of Kauffman revealed the following:
(1) The mix of senior staff and junior staff billable time varies considerably across client
engagements.
(2) Most of the “unassigned time” of the professional staff is actually spent on professional
development activities, marketing activities and travel. On average, systems analysts report 35%
of their time as “unassigned” while junior professional staff report only 5% of their time as
“unassigned.” The managing partner feels that approximately 40% of the unassigned time of a
systems analyst is spent on marketing activities while the remaining 60% is spent on professional
development and travel. The junior professional staff are hardly ever used for marketing
activities.
(3) Systems analysts have much larger offices than others and occupy about 40% of Kauffman’s
office space. About 20% of the space is occupied by the secretarial staff and the remaining 40%
is occupied by the junior professional staff.
(4) About 80% of the time of Kauffman’s secretarial and office staff is spent on servicing the
systems analysts and only 20% on servicing the junior professional staff.
(5) About 90% of the computer equipment is used by junior professional staff and only 10% by
systems analysts.
(7) The managing partner feels that marketing expenses are an essential cost of doing business
and an essential cost of building a professional image. Kauffman would generally put in a
greater marketing effort on bigger potential jobs and jobs that provide higher billing rates.
Required:
Redesign Kauffman’s cost accounting system, keeping in mind the background facts described at
the beginning of this case. For this purpose you need to discuss:
(i) Which costs should be directly traced to individual client engagements, keeping in
mind the feasibility of doing so.
(ii) Which costs should be treated as support costs? Group these support costs into
appropriate overhead cost pools and, using the data supplied in the case, calculate
the cost driver rates that would be used to assign support costs to specific client
engagements.
Wherever necessary, present brief arguments to justify your design. (You are not expected to
design vouchers and documents or ledger accounts and journal entries).
Solution
In knowledge industries, job costing focuses more on direct labor rather than material
since it relies on customer’s interaction and support to make money.
Client engagement
Travel cost to that client engagement
Let’s calculate the cost that be traced directly to each client engagement
There are 40 professional staff working for Kauffman & Associates, their weekly compensation
is follow
The remaining time can be allocated as “unassigned time”, the total time can be broken down as
follows:
The unassigned time for senior professional is broken down further as followed:
The junior engineer spends 95% on assigned time and 5% on unassigned time, which is mostly
traveling.
So labor hour spends on customer’s engagement as “billable hours” and traveling to customer’s
site should be traced to each individual client’s engagement.
Driver rate = $20,00* volume space used = $2000 per 10% used.
Cost allocation:
Junior Professional: $2000* 4 = $8,000
Senior Professional: $2000*4 = $8,000
Travel $11,538.5
Cost allocation:
Junior professional - $80.128* 60 = $4,807.71
Senior professional - $80.128 *84 = $6,730.75
Cost allocation:
Junior professional - $1,200 * 2 = $2,400
Senior professional - $1,200 * 8 = $9,600
Computer Associated Costs $8,000
Cost allocation:
Junior professional - $800 * 9 = $7,200
Senior professional - $800 * 1 = $800
Stationary $2,000
Cost allocation:
Junior professional - $200 *5 = $1,000
Senior professional - $200 * 5= $1,000
$20.53/hour $112.04/hr