Chapter 9-Cost Accounting For Service Businesses: Multiple Choice

CHAPTER 9—COST ACCOUNTING FOR SERVICE BUSINESSES
MULTIPLE CHOICE
1. Which of the following is a characteristic of a service organization?

a. Provides a tangible product
b. Carries large inventories
c. Receives payments for physical properties
d. Service is consumed at time it is provided
ANS: D
Answers a, b, and d all involve tangible products; only answer c involves a service.
PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic
2. Which of the following is generally not considered a service organization?

a. Hair stylists
b. Lawyers
c. Auto dealerships
d. Plumbers
ANS: C
An auto dealership has as its principle function the selling of automobiles rather than a service.
Although physical items are obtained from hair stylists, lawyers, and plumbers, the principle function
they perform is a service.
PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Reflective
3. Service organizations display the following characteristics, except that:

a. They create more jobs than do manufacturers.
b. They employ more people than do manufacturing concerns.
c. They carry larger inventories than do manufacturing concerns.
d. They account for more than half of all goods and services produced.
ANS: C
Service organizations are a major component in the United States economy. A characteristic that they
do not have, however, is the carrying of large inventories. A service is not a tangible, inventoriable
item.
PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Reflective
4. Examples of service businesses that would use job order costing would include all of the following
except:
a. an accounting firm that has audit clients of various sizes and complexities.
b. a “quick oil change” shop that offers only basic maintenance services.
c. an automotive body repair shop specializing in collision repair.
d. a high end salon offering hair, manicure and spa services.
ANS: B
The accounting firm, collision repair shop and the salon would have customers (jobs) with varying
complexities and sizes. Job order costing would be beneficial in these cases. The oil change shop that
offers only basic maintenance services such as oil changes, would not have as many complexities
among its customers as the others.
PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective
5. A service firm, such as a law firm, would choose direct labor dollars over direct labor hours as a cost
driver for overhead because:
a. Overhead is more related to dollars charged than hours worked.
b. Labor hours are harder to track.
c. Labor rates change and thus overhead is automatically updated.
d. Partners and managers incur overhead equally.
ANS: A
Overhead based on labor dollars takes into account that the higher paid individual often incurs more
overhead than someone with a smaller salary. A partner in a law firm uses more administrative time
and has a nice office than does a new attorney, although they both may work the same number of
hours.

6. An example of a direct cost that can be specifically identified with a job and does not have to be
allocated to the job using an overhead rate is:
a. travel expenses.
b. fringe benefits.
c. utilities.
d. office machine lease costs.
ANS: A
Travel expenses can usually be specifically identified with a job.
PTS: 1 DIF: Easy REF: P. OBJ: 1

7. Boyle’s Body Shop repairs automobiles that have been involved in collisions. It’s budget information
follows:
Budgeted direct labor cost $200,000
Budgeted overhead 500,000
Budgeted labor rate per hour $10
Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on
direct labor hours. Paul Evans brought his car to Boyle for fender repair. It took 5 hours and the new
parts for the job totaled $200. How much overhead was applied to the Evans job?
a. $50
b. $125
c. $200
d. $175
ANS: B
Predetermined overhead rate = Budgeted overhead / Budgeted cost driver
Predetermined overhead rate = $500,000 / 20,000 direct labor hours* = $25 per hour.
Applied overhead = Predetermined overhead rate x actual cost driver for job
Applied overhead = $25 x 5 hours = $125.
* Budgeted direct labor cost / Budgeted labor rate = Budgeted direct labor hours
$200,000 / $10 = 20,000 hours

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
follows:
parts for the job totaled $200. What was the total cost of the Evans job?
a. $375
b. $200
c. $250
d. $325
ANS: A
$200,000 / $10 = 20,000 hours
Direct materials $200

Direct labor (5 hours x $10) 50
Applied overhead 125
Total for job $375

follows:
parts for the job totaled $200. If Evans was charged $500, what was the percentage of profit to the
selling price?
a. 35%
b. 60%
c. 50%
d. 25%
ANS: D
$200,000 / $10 = 20,000 hours
Direct materials $200

Direct labor (5 hours x $10) 50
Applied overhead 125
Total for job $375
Profit for job = $500 - $375 = $125

Profit percentage = $125 / $500 = 25%
PTS: 1 DIF: Hard REF: P. OBJ: 1

10. A report that compares the budgeted costs for the job to the actual costs incurred and indicates the
variances is a:
a. Budget analysis.
b. Job cost sheet.
c. Cost analysis.
d. Cost performance report.
ANS: D
A cost performance report compares budgeted cost to actual costs incurred for a job, and indicates the
variances.

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic
11. The first budget to be prepared for a professional services firm should be the:
a. Direct expense budget.
b. Labor budget.
c. Overhead budget.
d. Revenue budget.
ANS: D
The revenue budget should be the first budget prepared because the amount of client business must be
projected before estimating the labor hours and overhead required.

NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective
12. Items that should be considered in developing a revenue budget for a professional firm include all of
the following except:
a. Expected new business.
b. Expected mix of professional labor hours.
c. Expected mix of work.
d. All of these should be considered in preparing a revenue budget for a professional firm.
ANS: D
A firm should consider expected new business, the mix of hours (due to different rates charged), and
the mix of work (different departments may bill at different rates).

13. Which of the following should be included in computing a revenue budget for a professional services
firm?
a. Wage rates.
b. Predetermined overhead rate.
c. Billing rate.
d. Direct costs.
ANS: C
A professional firm would use billing rates multiplied by the estimated labor hours in each category to
determine budgeted revenue.

14. Hebert & Co. CPA’s anticipates that partners will bill 2,000 professional hours, managers will bill
7,500 professional hours and staff accountants will bill 25,000 professional hours. Billing rates are
$250, $150 and $75 for partners, managers and staff accountants, respectively. What is Hebert & Co.’s
budgeted revenue?
a. $5,462,500
b. $3,500,000
c. $5,175,000
d. $3,750,000
ANS: B
Partners 2,000 hours x $250 $ 500,000
Mangers 7,500 hours x $150 1,125,000
Staff 25,000 hours x $ 75 1,875,000
Total budgeted revenue $3,500,000

NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic
15. Hebert & Co. CPA’s anticipates that partners will bill 2,000 professional hours, managers will bill
7,500 professional hours and staff accountants will bill 25,000 professional hours. Salary rates are
$100, $60 and $30 for partners, managers and staff accountants, respectively. What is Hebert & Co.’s
budgeted professional labor cost?
a. $2,185,000
b. $2,070,000
c. $2,500,000
d. $1,400,000
ANS: D
Partners 2,000 hours x $100 $ 200,000
Mangers 7,500 hours x $ 60 450,000
Staff 25,000 hours x $ 30 750,000
Total budgeted professional labor cost $1,400,000

16. In a professional services firm, the term “overhead” refers to:

a. Expenses other than professional labor that can be traced to specific jobs.
b. Indirect labor costs.
c. Indirect expenses incurred to support the activities of the firm.
d. Indirect expenses incurred in the factory.
ANS: C
Overhead in a professional services firm includes indirect expenses to support the firm’s activities.
These expenses will include indirect labor and other costs. Expenses that can be traced to specific jobs
are direct costs.

17. All of the operating expenses in a professional firm are:

a. Overhead costs.
b. Period costs.
c. Labor costs.
d. Product costs.
ANS: B
All of the operating expenses in a professional firm are period costs because they are expensed as
incurred as there is no inventory amounts to which they can be attached.

18. A professional firm’s budgeted income statement would include all of the following lines except:
a. Cost of Goods Sold.
b. Overhead.
c. Revenue.
d. Labor.
ANS: A
A professional services firm’s budget would not include cost of goods sold as goods are not sold in a
services firm.

19. The practice of taking overhead costs previously in a single indirect cost pool and separating them into
a number of homogeneous cost pools with separate cost drivers for each pool is:
a. Peanut-butter costing.
b. Process costing.
c. Activities-based costing.
d. Job costing.
ANS: C
Activities-based costing is the process of separating overhead costs into a number of homogeneous
cost pools with separate cost drivers for each pool.
20. There are several advantages to using activity-based costing. Which of the following is one of these
advantages?
a. Services not performed in a department are allocated a portion of the cost of operating that
department.
b. Each department can choose the activity base that relates best to its cost.
c. Simplified costing is time-consuming and expensive to administer.
d. Activity-based rates are much less time-consuming to prepare.
ANS: B
Activity-based costing is applied by activity, allowing a closer matching of the incurrence of overhead
and the application of it.

21. An example of an indirect cost that could be traced directly to individual jobs by examining invoices
is:
a. Office rent.
b. Telephone and fax charges.
c. Depreciation expense on office machines.
d. Office supplies.
ANS: B
An analysis of telephone bills could aid in charging telephone and fax charges directly to clients.

22. The practice of assigning costs evenly to jobs using a single overhead rate when different jobs actually
consume resources in different proportions is sometimes called:
a. Smooth costing.
b. Process costing.
c. Activities-based costing.
d. Peanut-butter costing.
ANS: D
Sometimes the practice of assigning costs evenly to jobs using a single overhead rate is referred to as
“peanut-butter” costing.

23. Consider the budget information for Bert and Ernie Design firm:
Professional labor $1,000,000

Administrative labor 200,000
Lease expense 50,000
Design equipment depreciation 25,000
Samples and books 10,000
Utilities 20,000
Professional hours 100,000 hours
Number of rooms redone 2,000 rooms
Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the
number of rooms redone, and facilities costs, which is assigned to jobs based on the number of
professional labor hours. The design support cost pool includes design equipment depreciation and
samples and books. The lease expense and utilities are considered facilities costs.
What is the budgeted rate per cost driver for design support?
a. $17.50
b. $35.00
c. $.35
d. $.70
ANS: A
Design support includes the following costs:
Depreciation of design equipment $25,000
Books and samples 10,000
Total design support costs $35,000
Divided by number of rooms redone 2,000
Rate per number of rooms redone $17.50

24. Consider the budget information for Bert and Ernie Design firm:
Professional labor $1,000,000

Administrative labor 200,000
Design equipment depreciation 25,000
Samples and books 10,000
Utilities 20,000
Professional hours 100,000 hours
Number of rooms redone 2,000 rooms
Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the
number of rooms redone, and facilities costs, which is assigned to jobs based on the number of
professional labor hours. The design support cost pool includes design equipment depreciation and
samples and books. The lease expense and utilities are considered facilities costs.
What is the budgeted rate per cost driver for facilities costs?
a. $17.50
b. $1.05
c. $.70
d. $37.50
ANS: C
Facilities costs include the following costs:
Lease expense $ 50,000
Utilities 20,000
Total design support costs $ 70,000
Divided by number professional labor hours 100,000
Rate per number of professional labor hours $.70
25. Sanborn Architectural Designs Inc. has three partners that each earn $80,000 per year, and three
associates that earn $58,000 per year. Each partner and associate has 2,000 billable hours per year.
Using an activity-based costing approach, if a partner worked 10 hours on a project, the amount of
labor cost that should be billed to the project is:
a. $200.
b. $320.
c. $400.
d. $500.
ANS: C
Activity-based costing looks at the base in question--in this case, partners' salaries--and disregards
associates' salaries. Thus, a job would be billed as total cost divided by total hours.
3 x $80,000 240,000
= = 400 x 10 = $400
3 x 2,000 6,000

26. Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases.
Information about costs follow:
Cost Pool Budgeted Costs Budgeted Cost Driver Budgeted Rate
$2,000,000 professional $.75 / professional
Legal support $1,500,000 labor cost labor dollar
$200 / partner labor
Secretarial support 800,000 4,000 partner labor hours hour
12,000 professional labor $50 / professional
Facilities 600,000 hours labor hour
The Laurel case required 60 professional hours, 20 of which were partner hours, and labor costs
totaled $10,000. How much overhead was assigned to the Laurel case?
a. $13,500
b. $14,000
c. $6,500
d. $14,500
ANS: D
Legal support $.75 x $10,000 $ 7,500
Secretarial support $200 x 20 hours 4,000
Facilities $50 x 60 hours 3,000
$14,500

27. Hunter and Quinn Collision Repair uses activity-based costing to determine the costs of its
cases. Information about costs follow:
Cost Pool Budgeted Costs Budgeted Cost Driver
Paint shop operations
and clean up $300,000 750 paint jobs
Machine costs 120,000 1,500 machine hours
Facilities 80,000 2,000 labor hours
Seth’s car was repaired after he was involved in a rear-end collision. The repair involved 3 hours of
machine time, 5 hours of labor at $30 per hour, and the rear of the car was repainted. How much
overhead was assigned to Seth’s repair job?
a. $2,000
b. $941
c. $990
d. $840
ANS: D
Cost Pool Budgeted Rate Seth’s job Overhead

Paint shop $300,000 / 750 = $400 per paint job 1 job $400
Machine costs $120,000 / 1,500 = $80 per mach. hr. 3 hours 240
Facilities $80,000 / 2,000 = $40 per labor hr. 5 hours 200
$840

28. Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases.
Information about costs follow:
Cost Pool Budgeted Costs Budgeted Cost Driver Budgeted Rate
$2,000,000 professional $.75 / professional
Legal support $1,500,000 labor cost labor dollar
$200 / partner labor
Secretarial support 800,000 4,000 partner labor hours hour
12,000 professional labor $50 / professional
Facilities 600,000 hours labor hour
The Laurel case required 60 professional hours, 20 of which were partner hours, and labor costs
totaled $10,000. If direct costs relating to the case were $1,000, what were the total costs of the Laurel
case?
a. $23,000
b. $25,500
c. $21,500
d. $15,500
ANS: B
Legal support $.75 x $10,000 $ 7,500
Secretarial support $200 x 20 hours 4,000
Facilities $50 x 60 hours 3,000
Total overhead applied $14,500
Labor costs $10,000

Overhead costs 14,500
Direct costs 1,000
Total costs of Laurel case $25,500

29. Sanborn Architectural Designs Inc. has three partners that each earn $80,000 per year, and three
associates that earn $58,000 per year. Each partner and associate has 2,000 billable hours per year.
Using a simplified approach, if a partner worked 10 hours on a project, the amount of labor cost that
should be billed to the project is:
a. $350.
b. $200.
c. $320.
d. $345.
ANS: D
A simplified approach generates an average rate (total earnings divided by total hours):
(3 x $80,000) + (3 x $58,000)
6 x 2,000
If a job used 10 hours, then the rate times the hours worked is:
$414,000
= $34.50 x 10 hours = $345
12,000

30. Natasha's Interior Designs has support staff for its professional designers. The two professionals work
a total of 1,800 hours each and make $45,000 each per year. The total support budget is $90,000, of
which $60,000 is professional support, and $30,000 is general office overhead. A job requiring 30
professional hours should be billed how much for overhead if a simplified costing approach is used
and hours are the cost driver?
a. $25
b. $30
c. $600
d. $750
ANS: D
Divide the total overhead incurred of $90,000 by the hours worked by the two professionals, 1,800
hours each, which results in $25 an hour. If a job takes 30 hours, then $25  30 hours = $750.
$90,000
= $25
3,600 hrs.
$25  30 hours = $750

31. Natasha's Interior Designs has support staff for its professional designers. The two professionals work
a total of 1,800 hours each and make $45,000 each per year. The total support budget is $90,000, of
which $60,000 is professional support, and $30,000 is general office overhead. A job requiring 30
professional hours should be billed how much for overhead if a simplified costing approach is used
and labor cost is the cost driver?
a. $25
b. $30
c. $750
d. $900
ANS: C
Labor cost is calculated by determining that each associate works for $25 an hour ($45,000 / 1,800 =
$25 per hr.). If two professionals each work 1,800 hours, or a total of 3,600 hours, at $25 an hour, the
total labor cost is $90,000. The overhead of $90,000 divided by the cost driver labor cost of $90,000
gives an overhead rate of $1 per $1 of labor cost. If the job incurred professional pay of $750 (30
hours x $25), then overhead applied should be $750.

32. Determining whether the benefit received from more refined information exceeds the cost of obtaining
the information is a(n):
a. Pricing decision.
b. Activity-based cost model.
c. Cost/benefit decision.
d. Cost performance report.
ANS: C
A cost/benefit decision involves weighing the cost of obtaining more refined information against the
benefit that the additional information may have to the decision making process. In some cases, the
difference in the costs determined with the additional information to the costs determined originally is
not significant enough to change the decision, so the benefit of obtaining the additional information
did not justify the cost.

NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic
33. Which of the following is not one of the categories of a balanced scorecard?
a. Customer
b. Financial
c. Learning and Growth
d. Quality
ANS: D
The four categories of the balanced score card are: Learning and Growth, Internal Business Processes,
Customer and Financial.

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic
34. In creating a balanced scorecard, the number of quality defects would belong to which category of
performance measures?
a. Learning and Growth
b. Internal Business Processes
c. Customer
d. Financial
ANS: B
The number of quality defects would be an indication of how efficient a company’s production process
is.

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective
35. In creating a balanced scorecard, the number of customer complaints would belong to which category
of performance measures?
c. Customer
d. Financial
ANS: C
The number of customer complaints would be an indication of how satisfied a company’s customers
are.

36. In creating a balanced scorecard, the rate of employee turnover would belong to which category of
c. Customer
d. Financial
ANS: A
The rate of employee turnover would be an indication of how satisfied a company’s employees are.

37. In creating a balanced scorecard, the return on investment would belong to which category of
c. Customer
d. Financial
ANS: D
The return on investment would be an indication of how profitable the company is.

38. Which of the following is the best example of a non-financial performance measure for the customer
perspective of an airline’s balanced scorecard?
a. Percentage of seats filled.
b. Pilot flight hours.
c. Percentage of on-time arrivals.
d. Revenue per flight.
ANS: A
The percentage of seats filled would be an indication of customer satisfaction. Pilot flight hours would
be included in the learning and growth perspective as it is an indicator of employee experience and
training. Percentage of on-time arrivals is an indicator of efficiency and would be included in the
Internal Business Perspective. Revenue per flight is a financial measure.
Note to faculty: This problem could be amended so that the student could answer the question about
any one of the four perspectives of the balanced scorecard for an airline.

39. Which of the following is the best example of a non-financial performance measure for the learning
and growth perspective of a college’s balanced scorecard?
a. Size of endowment.
b. Number of degrees awarded.
c. Number of conferences attended by faculty members.
d. Percentage of students retained from freshman to sophomore year.
ANS: C
The number of conferences attended by faculty members is an indication of training or growth. The
size of the endowment is a financial measure. The number of degrees awarded would be an internal
business process measure and the percentage of students retained from freshman to sophomore year
would be an indication of customer satisfaction.
any one of the four perspectives of the balanced scorecard for a college.

40. Which of the following is the best example of a non-financial performance measure for the internal
business process perspective of a professional baseball team’s balanced scorecard?
a. Number of repeat season ticket holders
b. Win - loss record.
c. Revenue from team apparel.
d. Number of top minor league prospects.
ANS: B
The win-loss record would be an indication of how well the company is performing its processes, in
this case winning games. The number of repeat season ticket holders would be an indication of
customer satisfaction. The revenue from team apparel would be a financial measure. The number of
top minor league prospects could be a measure of learning and growth (training).
any one of the four perspectives of the balanced scorecard for a baseball team.

41. When creating a balanced scorecard, the following guidelines should be followed in choosing
performance measures except:
a. There should not be too many performance measures.
b. There should be more financial measures than any of the other categories.
c. The measures should be consistent with company strategy.
d. Employees should be able to understand and have control over the performance measures
on which they are evaluated.
ANS: B
A balanced scorecard should not be weighted toward financial measures. Too many measures may
cause employees to lose focus of what is important, and employees should understand and have
control over the performance measures on which they are evaluated. The measures should be
consistent with company strategy.

PROBLEM
1. Joleen Harmon, CPA, has two clients and uses a job order cost system. Client A requires 20 hours of
partner time and 100 hours of staff time. Client B will use 12 hours of partner time and 75 hours of
staff time. Partners are paid $85 an hour and bill support time at 50% of their hourly rate. Staff are
paid $25 an hour and bill support time at $20 per billable hour. What is the total charge to each of
these clients if profit is added at 20% over cost?
ANS:
Client A:
20 partner hours at $85 $1,700
Partner support, 50%  $1,700 850
Staff, 100 hours at $25 2,500
Staff support, 100  $20 2,000
Total cost $7,050
Profit (20%  $7,050) 1,410
Client bill $8,460
Client B:
12 partner hours at $85 $1,020
Partner support, 50%  $1,020 510
Staff, 75 hours at $25 1,875
Staff support, 75  $20 1,500
Total cost $4,905
Profit (20%  $4,905) 981
Client bill $5,886

2. Walters and Witt, a law firm that uses job order costing, is analyzing the profitability of its cases.
During the year, the firm represented the Umberg Company in numerous routine legal issues, for
which it charged a monthly retainer fee of $2,500. Budget information for the firm follows:
Direct labor:
Partners $ 500,000
Associates 900,000
Paralegals 600,000
Total $2,000,000
Overhead:
Secretarial support $ 900,000
Depreciation of office equipment 300,000
Fringe benefits 400,000
Utilities 300,000
Communication expenses 250,000
Office supplies 150,000
Total $2,500,000
Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Budgeted and actual time for the Umberg case follows:

Budget Actual
Partners 20 hours 23 hours
Associates 40 hours 42 hours
Paralegals 80 hours 72 hours
In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for
$1,000 of direct costs.
(a) Assuming that Walters and Witt allocates overhead to jobs using direct labor cost as the cost
driver, compute the predetermined overhead rate.
(b) Compute the cost of the Umberg work this year.
(c) Prepare a cost performance report for the Umberg work this year.
(d) Compute the profit that Walters and Witt had on the Umberg work this year.
ANS:
(a) Predetermined overhead rate = budgeted overhead / budgeted cost driver.
Predetermined overhead rate = $2,500,000 / $2,000,000 = 125%
(b) (c) Partner rate* $100 x 125% = $125 + $100 = $225

Associate rate* $60 x 125% = $75 + $60 = $135
Paralegal rate* $20 x 125% = $25 + $20 = $45
* Includes direct labor plus overhead based on direct labor cost.
Actual:
Partner 23 hours x $225 $5,175
Associate 42 hours x $135 5,670
Paralegal 72 hours x $45 3,240
Budgeted:
Partner 20 hours x $225 $4,500
Umberg Company
Cost Performance Report
For year ended December 31, 20--
Item Actual Result Budget Variance
Partners’ salaries and overhead $ 5,175 $ 4,500 $675 U
Associates’ salaries and overhead 5,670 5,400 270 U
Paralegals’ salaries and overhead 3,240 3,600 360 F
Direct costs 875 1,000 125 F
Total $14,960 $14,500 $460 U
U = Unfavorable; F = Favorable
(d) Annual revenue for the Umberg work = $2,500 x 12 = $30,000

Profit = $30,000 - $14,960 = $15,040 (50.1%)

NAT: IMA 2B - Cost Management; 2D - Performance Measurement
TOP: AACSB - Analytic
3. Domino Consulting has two departments, Information Technology Consulting and General Business
Consulting. The firm has Partners, Senior Consultants and Junior Consultants in each department.
The firm is preparing its budgets for the upcoming year.
The controller received the following information from the marketing department about anticipated
demand for the firm’s products in the upcoming year:
Department: Total Professional Hours:

Information Technology 32,000
General Business 40,000
The controller then worked with the human resources department to determine the following
information about staffing and salary rates for each department:
Information Technology General Business
Ratio of partner hours: senior
consultant hours: junior consultant
hours 1:2:7 1:2.5:6.5
Salary Rates per hour:

Partner $150 $125
Senior Consultant $75 $60
Junior Consultant $40 $30
The controller has also determined that in order to be profitable, billing rates should be three times the
amount paid to employees. The marketing department has determined that billing rates computed on
that basis are comparable to what other consulting firms charge.
(a) Prepare a revenue budget for Domino Consulting Company.
(b) Prepare a labor budget for Domino Consulting Company.
ANS:
(a)
Domino Consulting Company
Revenue Budget
For the Year Ended December 31, 20--
Item Professional Hours* Billing Rate** Total Revenues

Information Technology:
Partner 3,200 $450 $ 1,440,000
Senior Consultant 6,400 225 1,440,000
Junior Consultant 22,400 120 2,688,000
Subtotal 32,000 $ 5,568,000
General Business:
Partner 4,000 $375 $ 1,500,000
Senior Consultant 10,000 180 1,800,000
Junior Consultant 26,000 90 2,340,000
Subtotal 40,000 $ 5,640,000
Total 72,000 $11,208,000
Professional hours were computed as follows:

Information Technology: 1+2+7 = 10
1/10 x 32,000 = 3,200 partner hours
2/10 x 32,000 = 6,400 senior consultant hours
7/10 x 32,000 = 22,400 junior consultant hours
General Business: 1+2.5+6.5 = 10
1/10 x 40,000 = 4,000 partner hours
2.5/10 x 40,000 = 10,000 senior consultant hours
6.5/10 x 40,000 = 26,000 junior consultant hours
** Billing rates were obtained by multiplying the appropriate salary rate by 3.
Domino Consulting Company

Professional Labor Budget
For the Year Ended December 31, 20--
Item Professional Hours* Wage Rate Total Labor Dollars

Information Technology:
Partner 3,200 $150 $ 480,000
Senior Consultant 6,400 75 480,000
Junior Consultant 22,400 40 896,000
Subtotal 32,000 $1,856,000
General Business:
Partner 4,000 $125 $ 500,000
Senior Consultant 10,000 60 600,000
Junior Consultant 26,000 30 780,000
Subtotal 40,000 $1,880,000
Total 72,000 $3,736,000

4. Frederick and Ivey, CPA have the following budgeted items for the month of July:
Depreciation - equipment $2,500
Lease expense 3,000
Professional salaries (from budget) 10,000
Professional dues and subscriptions 1,500
Revenues (from budget) 35,000
Utilities 1,000
Secretarial support 2,800
Travel 1,200
Prepare a budgeted income statement for the month of July.
ANS:
Frederick and Ivey, CPA
Budgeted Income Statement
For the Month Ended July 31, 20--
Revenues (from Revenue budget) $35,000

Operating Costs:
Professional labor (from Professional
Labor Budget) $10,000
Overhead support * 15,800
Direct costs ** 1,200 27,000
Operating Income $ 8,000
*Overhead Budget:
Depreciation - equipment $ 2,500
Lease expense 3,000
Professional dues and subscriptions 1,500
Utilities 1,000
Secretarial support 2,800
Total $15,800
**Travel is usually a direct cost related to specific jobs.

5. Walters and Witt, a law firm, is analyzing the profitability of its cases. During the year, the firm
represented the Umberg Company in numerous routine legal issues, for which it charged a monthly
retainer fee of $2,500. Budget information for the firm follows:
Professional labor:
Partners $ 500,000
Associates 900,000
Paralegals 600,000
Total $2,000,000
Overhead:
Secretarial salaries $ 900,000
Depreciation of office equipment 300,000
Utilities 300,000
Communication expenses 250,000
Office supplies 150,000
Total $2,500,000
Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Actual time spent for the Umberg cases follows:

Actual
Partners 23 hours
Associates 42 hours
Paralegals 72 hours
In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for
$1,000 of direct costs.
Walters and Witt uses activity-based costing to determine the cost of its cases. With a consultant’s
help, the firm has developed the following information about cost pools:
Cost Pool Expenses Included Cost Allocation Base

Secretarial support Secretarial salaries Partner labor hours
Fringe benefits Fringe benefits Professional labor dollars
Depreciation, lease, utilities,
Office support communications and supplies Professional labor hours
(a) Compute the budgeted rate per unit of cost driver for each cost pool.
(b) Using activity-based costing, compute the cost of the Umberg work this year.
(c) Compute the profit that Walters and Witt had on the Umberg work this year.
ANS:
(a)
Cost Pool Budgeted Costs Budgeted Cost Drivers Budgeted Rate
Secretarial support $ 900,000 5,000 partner hours* $180/ partner labor hour
20% professional labor
Fringe benefits 400,000 $2,000,000 dollars
$24/ professional labor
Office support 1,200,000** 50,000 hours* hour
*Budgeted hours:
Partners: $500,000/$100 = 5,000 hours
Associates $900,000/$60 = 15,000 hours
Paralegals $600,000/$20 = 30,000 hours
Total hours 50,000 hours
(b)
Actual professional labor:
Partner 23 hours x $100 $ 2,300
Total labor 137 hours $ 6,260
Overhead:
Secretarial support 23 hours x $180 $ 4,140
Fringe benefits $6,260 x 20% 1,252
Office support 137 hours x $24 3,288
Total overhead $ 8,680
Total $14,940
(c) Annual revenue for the Umberg work = $2,500 x 12 = $30,000

Profit = $30,000 - $14,940 = $15,060 (50.2%)

6. Dye and Dye, Attorneys-at-Law, each bill 1,500 hours per year and receive pay of $100,000 each.
Four paralegals work for the firm and each receives pay of $40,000 and works 2,000 hours per year.
Overhead of $396,000 is anticipated, of which $300,000 is attorney support, and the rest is paralegal
support. Determine overhead under each of the following circumstances:
a. A simplified cost approach is used based on hours.

b. A simplified cost approach is used based on payroll dollars.
c. An activity-based costing approach is used. Attorney support is based on labor costs,
and paralegal support is based on hours worked.
ANS:
(a) 1,500 professional hours  2 = 3,000

2,000 paralegal hours  4 = 8,000
Total hours 11,000
Overhead costs of $396,000 / 11,000 = $36 per hour
(b) $100,000  2 = $200,000

$ 40,000  4 = 160,000
$360,000 total payroll
$396,000 overhead / $360,000 payroll = $1.10 of overhead per dollar of payroll
(c) $100,000  2 = $200,000; $300,000 / $200,000 = $1.50 of overhead per dollar of attorney
payroll
$396,000 - $300,000 (attorney support) = $96,000

$96,000 / (4  2,000) = $12 per hour of paralegal support
PTS: 1 DIF: Moderate REF: P. OBJ: 3, 4

NAT: IMA 2B - Cost Measurement TOP: AACSB - Analytic
7. Listed below are balanced scorecard measure for various companies. Label each as either Learning
and Growth, Internal Business Processes, Customer or Financial.
On-time departures Worldwide Airlines
Percentage of customers retained for

next season Hi-Growth Lawn Care
Drive-through waiting times Burger Boy Fast Foods
Profit margin Porter Company
Number of teachers on staff having

masters degrees Central High School
Number of customer complaints TV Cable Company
Number of defective products

manufactured Nyso Manufacturing
Percentage of customer accounts
collected City Hospital
Rate of table turnover Neighborhood Chili Parlor
Number of employees receiving five,

ten and twenty year service pins Zimmerman Manufacturing
ANS:
On-time departures Internal business process - would indicate how well
the airline was sticking to its schedule.
Percentage of customers Customer - would indicate how satisfied customers

retained for next season were with their service this season.
Drive-through waiting times Internal business process - would indicate how quickly
the company was preparing fast food orders.
Profit margin Financial
Number of teachers on staff Learning and growth - would be an indication of the

having masters degrees amount of training that the teachers have.
Number of customer Customer - would be an indication of the level of

complaints customer satisfaction.
Number of defective products Internal business processes - would be an indication

manufactured of the efficiency of the manufacturing process.
Percentage of customer Financial - would be an indication of how much cash

accounts collected the hospital is collecting.
Rate of table turnover Internal business processes - would be an indication of

how quickly patrons are being served.
Number of employees Learning and growth - employee longevity is an

receiving five, ten and twenty indication of employee satisfaction.
year service pins

8. Good Locks is a high end salon which offers hair cuts and styling and manicures and pedicures.
Debbie Tresser is the owner of Good Locks and she is working with a consultant to develop a balanced
scorecard to be used to evaluate the performance of Good Locks and to focus her efforts on making
improvements to operations when necessary.
Required:
1. Name the four perspectives of a balanced scorecard.
2. For each of the four perspectives, name two measures Debbie should consider
including in her scorecard.
ANS:
1. The four perspectives are: Learning and Growth, Internal Business Processes, Customer and
Financial
2. Potential perspectives include:

Learning and Growth:
Employee turnover
Number of continuing education hours attended by staff members
Number of licenses held by staff members
Internal Business Processes

Average wait time for appointments
Average time of service
Number of “accidents” where someone’s hair is dyed the wrong color, etc.
Number of hours without a safety incident
Board of health certification as to cleanliness
Customer
Number of customer complaints
Result of customer surveys
Number of repeat customers
Number of new customers resulting from referrals
Financial
Revenues
Operating income
Profit margin for each service
Booth rental income

NAT: IMA 2D - Performance Evaluation TOP: AACSB - Reflective

Chapter 9-Cost Accounting For Service Businesses: Multiple Choice

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Chapter 9-Cost Accounting For Service Businesses: Multiple Choice

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CHAPTER 9—COST ACCOUNTING FOR SERVICE BUSINESSES

1. Which of the following is a characteristic of a service organization?

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

2. Which of the following is generally not considered a service organization?

PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

3. Service organizations display the following characteristics, except that:

PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Easy REF: P. OBJ: 1

PTS: 1 DIF: Moderate REF: P. OBJ: 1

Direct materials $200

PTS: 1 DIF: Moderate REF: P. OBJ: 1

Direct materials $200

Profit for job = $500 - $375 = $125

PTS: 1 DIF: Hard REF: P. OBJ: 1

PTS: 1 DIF: Easy REF: P. OBJ: 1

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

16. In a professional services firm, the term “overhead” refers to:

PTS: 1 DIF: Easy REF: P. OBJ: 2

17. All of the operating expenses in a professional firm are:

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Easy REF: P. OBJ: 3

Professional labor $1,000,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

Professional labor $1,000,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 3

Cost Pool Budgeted Rate Seth’s job Overhead

PTS: 1 DIF: Moderate REF: P. OBJ: 3

Labor costs $10,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 4

$25  30 hours = $750

PTS: 1 DIF: Moderate REF: P. OBJ: 4

PTS: 1 DIF: Hard REF: P. OBJ: 4

PTS: 1 DIF: Easy REF: P. OBJ: 4

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 1

Budgeted and actual time for the Umberg case follows:

(b) Compute the cost of the Umberg work this year.

(b) (c) Partner rate* $100 x 125% = $125 + $100 = $225

* Includes direct labor plus overhead based on direct labor cost.

(d) Annual revenue for the Umberg work = $2,500 x 12 = $30,000

PTS: 1 DIF: Moderate REF: P. OBJ: 1

Department: Total Professional Hours:

Salary Rates per hour:

(a) Prepare a revenue budget for Domino Consulting Company.