Questions to be discussed in tutorial class

Week 5
Topic 4 (Chap 4 & 6)
REVIEW QUESTION
4.2 ‘A discussion of product costing systems is irrelevant to our firm as we only produce
services, not products.’ Discuss.
6.6 In estimating the costs of products, manufacturers usually identify direct material, direct
labour and manufacturing overhead costs. What modifications may be made to these
classifications in estimating service costs?

PROBLEM
6.36 Job costing: consulting firm
Kiwi Consulting Services provides consulting services throughout Australia and New
Zealand. It uses a job costing system to accumulate the cost of client projects. Traceable costs
are charged directly to individual clients; in contrast, other costs incurred by Kiwi but not
identifiable with specific clients are charged to jobs by using a predetermined overhead rate.
Clients are billed for directly chargeable costs, overhead and a markup for the profit margin.
Kiwi’s financial controller, Janet Campbell, anticipates the following costs for the coming
year:
Cost Percentage of cost directly
traceable to clients
Professional staff salaries $2 500 000 80%
Administrative support staff 500 000 50%
Travel 250 000 95%
Photocopying 50 000 95%
Other operating costs 100 000 50%
Total $3 400 000

The firm’s management wishes to make an $850 000 profit for the firm and plans to add a
percentage markup on total cost to achieve that figure.
On 10 April, Kiwi completed work on a project for AdCom Manufacturing. The following
costs were incurred:
Cost
Professional staff salaries $40 000
Administrative support staff 3 000
Travel 5 000
Photocopying 500
Other operating costs 1 500
 Questions to be discussed in tutorial class

Required:
1. Determine Kiwi’s total traceable costs for the coming year and the firm’s total anticipated
overhead.
2. Calculate the predetermined overhead rate, assuming the cost driver is traceable costs.
3. What percentage of cost will Kiwi add to each job to achieve its profit target?
4. Determine the total cost of the AdCom Manufacturing project.
5. How much would AdCom be billed for the services performed? Compare this approach to
the client billing system described in this chapter.
6. Notice that only 50 per cent of Kiwi’s other operating costs is directly traceable to
specific client projects. Identify several costs that would be included in other operating
costs and would be difficult to trace to clients.
7. Notice that 80 per cent of the professional staff cost is directly traceable to specific client
projects. Give several reasons that would explain why this figure isn’t 100 per cent.