Spicer and Rabbit is an accounting firm that specialises in fraud investigation. In May, Jackson McInnes, the general manager of Jazz Industries, approached John house, a partner of Spicer and Rabbit, to discuss a problem that has arisen in one of his warehouses. McInnes is not sure whether fraud is involved or not, but over the past year there have been a series of unexplained inventory shortages, and he has heard rumours of some warehouse staff selling supplies for cash to friends. at greatly reduced prices. McInnes would like Spicer and Rabbit to conduct an investigation to see if there is any evidence of misappropriation. This matter is urgent and McInnes would like a final report within the next two weeks.
John House agrees to undertake the investigation. He will oversee the project. Christine Miller will manage the project and Graeme Smith will assist. The following labour rates apply:
At the end of each week, every employee of Spicer and Rabbit completes a time sheet online, to account for each hour of their day. The following extracts are taken from time sheets for the three staff involved in the investigation. The Jazz Industries case has been assigned the code 4506B:
Spicer and Rabbit calculate a predetermined overhead rate to cover support staff salaries, office rent, utilities and telecommunication costs, marketing costs, and other costs of running the firm. Professional labour costs make up about 75 per cent of the firm’s total operating costs. The anticipated overhead cost for the current year is E4 000 000.
1. Calculate the predetermined overhead rate per dollar of professional labour.
2. Explain how the firm can justify using a single overhead rate to cost each case.
3. Use the information in the time sheets to prepare a client cost sheet for the Jazz Industries investigation, similar to that in Exhibit 6.8.
4. Determine the total cost of the investigation.
5. Spicer and Rabbit operate in a very competitive market and cannot always charge clients prices sufficient to cover the full cost of undertaking a case. In the light of this information:
(a) Why would Spicer and Rabbit require staff to fill in detailed time sheets?
(b) What use could the partners make of the client cost sheet, and the total cost of the case?
(c) I-low could John House justify undertaking the investigation of Jazz Industries for a loss?
6 If Spicer and Rabbit introduced a client billing system, in what ways would it differ from the costing system described above?
7 Would you recommend that Spicer and Rabbit use a client costing system, a client billing or both? Explain your answer.