Mike Kyekyeku Is a Sole Proprietorship That Provides Consulting and Tax

question 91

Essay

Mike Kyekyeku is a sole proprietorship that provides consulting and tax preparation services to its clients.Mike charges a fee of $100 per hour for each service and can devote a maximum of 4,000 hours annually to his clients.He reported the following revenues and expenses for 2014:
$\begin{array}{|l|r|r|}\hline\text { Revenue }&&\$400,000\\\hline \begin{array}{l}\text { Expenses (All overhead } \\\text { costs): }\end{array} & & \\\hline \text { Secretarial support } & \$ 84,000 & \\\hline \text { Supplies } & 72,000 & \\\hline \text { Computer costs, etc. } & \underline{48,000} &\underline{204,000} \\\hline \text { Net income (loss) } & & \$ 196,000\\\hline \end{array}$

Being an accountant,Mike kept good records of the following data for 2014:
(i).Revenue:
$$\begin{array} { | l | r | } \hline \text { Tax preparation } & \$ 130,000 \\\hline \text { Consulting } & 270,000 \\\hline \text { Total } & \$ 400,000 \\\hline\end{array}$$

(ii).
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { ACTIVITY LEVEL }$
$\begin{array}{|l|l|r|r|r|}\hline \text { Overhead Cost } & \text { Cost Driver } & \text { Tax } & \text { Consulting } & \text { Total } \\\hline \begin{array}{l}\text { Secretarial } \\\text { support }\end{array} & \text { Number of clients } & 72 & 48 & 120 \\\hline \text { Supplies } & \begin{array}{l}\text { Tr Answeractions } \\\text { with clients }\end{array} & 200 & 300 & 500 \\\hline \begin{array}{l}\text { Computer costs, } \\\text { etc. }\end{array} & \text { Computer hours } & 1,000 & 600 & 1,600 \\\hline\end{array}$

Required:
a.Should Mike emphasize one service more than the other if Mike were to allocate all the overhead costs using direct-labours as the only overhead cost driver (1,300 for Tax and 2,700 for Consulting)? Support your decision with the relevant calculations and/or analysis.
b.Identify each of the three cost drivers as either unit-level,batch-level,product-level,customer-level,or organization-sustaining.
c.How might Mike's product/service emphasis decision in Partaabove be altered if he were to allocate all the overhead costs using activity-based costing and the three cost drivers,that is,number of clients,number of transactions with clients,and computer hours? Show all your supporting calculations and/or analysis,including any necessary explanation.

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