Questions:
Activity-Based versus Traditional Costing-Ethical Issues
Wendy Chen established Windy City Coaching (WCC) to provide teen counseling and executive coaching services to its clients. WCC charges a $300 fee per hour for each service. The revenues and costs for the year are shown in the following income statement:
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WINDY CITY COACHING
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Income Statement
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Teen
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Executive
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Counseling
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Coaching
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Total
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Revenue
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$66,000
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$135,000
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$201,000
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Expenses:
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Administrative support
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40,000
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Transportation, etc
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|
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36,000
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Equipment
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20,000
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Profit
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$105,000
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WCC has kept good records of the following data for cost allocation purposes:
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Activity Level
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Activity
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Cost Driver
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Teen
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Executive
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Providing administrative support
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Number of clients
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Counseling
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Coaching
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Traveling
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Number of visits
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6
|
4
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Using equipment
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Computer hours
|
100
|
150
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|
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900
|
700
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Required
a. Complete the income statement using activity-based costing and WCC's three cost drivers.
b. Recompute the income statement using direct labor-hours as the only allocation base (220 hours for teen counseling; 450 hours for executive coaching).
c. How might WCC's decisions regarding pricing or dropping a service be altered if Wendy were to allocate all overhead costs using direct labor-hours?
d. Under what circumstances would the labor-based allocation and activity-based costing (using Wendy's three cost drivers) result in similar profit t results?
e. A local nonprofit t charity is looking for worthy causes to support through financial grants. A primary criterion for support is financial need. Wendy is thinking of applying for support for the teen counseling program. Which allocation method would give her the best chance of winning a grant? Would it be ethical for Wendy to report the income using this method in her application?