Question

A local accounting firm employs 20 full-time professionals. The budgeted annual compensation per employee is $40,500. The average chargeable time is 500 hours per client annually. All professional labor costs are included in a single direct-cost category and are allocated to jobs on a per-hour basis.

Other costs are included in a single indirect-cost pool, allocated according to professional labor-hours. Budgeted indirect costs for the year are $787,500, and the firm expects to have 90 clients during the coming year.
If ten clients are lost and the workforce stays at 20 employees, then the direct labor cost rate per hour:
A) will remain the same as before
B) will increase
C) will decrease
D) is indeterminable

Answer 1

The direct labor cost rate per hour will remain the same if ten clients are lost, as the budgeted annual compensation per employee and the average chargeable hours are unchanged.

Step-by-step explanation:

The local accounting firm's direct labor cost rate per hour for its professionals is determined by dividing the total budgeted annual compensation by the total number of chargeable hours. In this case, since the budgeted compensation and the number of employees remain the same, the loss of ten clients will not affect the amount of compensation per employee or the average chargeable hours. Therefore, the direct labor cost rate per hour remains the same.

To further elaborate, the direct labor cost rate per hour is calculated as follows:

• Total annual compensation per employee: $40,500
• Average chargeable time per employee: 500 hours
• Direct labor cost rate per hour: Total annual compensation per employee / Average chargeable time = $40,500 / 500 hours = $81 per hour

Even with the loss of clients, since the budgeted compensation per employee and the expected average chargeable time do not change, the direct labor cost rate per hour remains unaffected.