Alternative allocation bases for a professional services firm

The Walliston Group (WG) provides tax advice to multinational firms. WG charges clients for (a) direct professional time (at an hourly rate) and (b) support services (at 30% of the direct professional costs billed). The three professionals in WG and their rates per professional hour are as follows:

WG has just prepared the May 2014 bills for two clients. The hours of professional time spent on each client are as follows:

Required:
1. What amounts did WG bill to San Antonio Dominion and Amsterdam Enterprises for May 2014?
2. Suppose support services were billed at $75 per professional labor-hour (instead of 30% of professional labor costs). How would this change affect the amounts WG billed to the two clients for May 2014? Comment on the differences between the amounts billed in requirements 1 and 2.
3. How would you determine whether professional labor costs or professional labor-hours is the more appropriate allocation base for WG's support services?

1.
Direct Professional Time Support Services Amount

Client Rate per Hour Number
of Hours
Total
Rate
Total Billed to
Client
(1) (2) (3) (4) = (2) ? (3) (5) (6) = (4) ? (5) (7) = (4) + (6)
SAN ANTONIO
DOMINION
Walliston
Boutin
Abbington

$640
220
100

26
5
39

$16,640
1,100
3,900

30%
30
30

$4,992
330
1,170

$21,632
1,430
5,070
$28,132
AMSTERDAM
ENTERPRISES
Walliston
Boutin
Abbington

$640
220
100

4
14
52

$2,560
3,080
5,200

30%
30
30

$768
924
1,560

$ 3,328
4,004
6,760
$14,092

2.
Direct Professional Time Support Services

Client Rate per Hour Number
of Hours
Total Rate per Hour
Total Amount
Billed to
Client
(1) (2) (3) (4) = (2) ? (3) (5) (6) = (3) ? (5) (7) = (4) + (6)
SAN ANTONIO
DOMINION
Walliston
Boutin
Abbington

$640
220
100

26
5
39

$16,640
1,100
3,900

$75
75
75

$1,950
375
2,925

$18,590
1,475
6,825
$26,890
AMSTERDAM
ENTERPRISES
Walliston
Boutin
Abbington

$640
220
100

4
14
52

$2,560
3,080
5,200

$75
75
75

$ 300
1,050
3,900

$ 2,860
4,130
9,100
$16,090

Requirement 1 Requirement 2
San Antonio Dominion $28,132 $26,890
Amsterdam Enterprises 14,092 16,090
$42,224 $42,980

Both clients use 70 hours of professional labor time. However, San Antonio Dominion uses a higher proportion of Walliston's time (26 hours), which is more costly. This attracts the highest support-services charge when allocated on the basis of direct professional labor costs.

3. Assume that the Walliston Group uses a cause-and-effect criterion when choosing the allocation base for support services. You could use several pieces of evidence to determine whether professional labor costs or hours is the driver of support-service costs:

a. Interviews with personnel. For example, staff in the major cost categories in support services could be interviewed to determine whether Walliston requires more support per hour than, say, Abbington. The professional labor costs allocation base implies that an hour of Walliston's time requires 6.40 ($640 ÷ $100) times more support-service dollars than does an hour of Abbington's time.
b. Analysis of tasks undertaken for selected clients. For example, if computer-related costs are a sizable part of support costs, you could determine if there was a systematic relationship between the percentage involvement of professionals with high billing rates on cases and the computer resources consumed for those cases.