Forrester and Cohen is a small accounting firm, managed by Joseph Cohen since the retirement in December of his partner Brad Forrester Answer

Forrester and Cohen is a small accounting firm, managed by Joseph Cohen since the retirement in December of his partner Brad Forrester. Cohen and his 3 CPAs can together bill 640 hours per month. When Cohen or another accountant bills more than 160 hours per month, he or she gets an additional “overtime” pay of $62.50 for each of the extra hours: This is above and beyond the $5,000 salary each draws during the month. (Cohen draws the same base pay as his employees.) Cohen strongly discourages any CPA from working (billing) more than 240 hours in any given month. The demand for billable hours for the firm over the next 6 months is estimated below:

Month Estimate of Billable Hours
Jan 600
Feb 500
Mar 1000
Apr 1200
May 650
Jun 590

 

 

Cohen has an agreement with Forrester, his former partner, to help out during the busy tax season, if needed, for an hourly fee of $125. Cohen will not even consider laying off one of his colleagues in the case of a slow economy. He could, however, hire another CPA at the same salary, as business dictates.

Refer to the CPA firm in Problem 13.20. In planning for next year, Cohen estimates that billable hours will increase by 10% in each of the 6 months. He therefore proceeds to hire a fifth CPA. The same regular time, overtime, and outside consultant (i.e., Forrester) costs still apply.

  1. a) Develop the new aggregate plan and compute its costs.

Ans:

Cost with the 1st plan of 4 CPA’s and using Forrester as outside consultant (Previous aggregate plan)

Month Estimate of Billable Hours Capacity Extra Hours Regular Cost Overtime Forrester Total Cost
Jan 600 640 -40 20000 0 0 20000
Feb 500 640 -140 20000 0 0 20000
Mar 1000 640 360 20000 20000 5000 45000
Apr 1200 640 560 20000 20000 30000 70000
May 650 640 10 20000 625 0 20625
Jun 590 640 -50 20000 0 0 20000
Total Cost   195625

 

Cost with the 2nd plan of 5 CPA’s and using Forrester as outside consultant with increased billable hours (New aggregate plan)

 

Month Estimate of Billable Hours Capacity Extra Hours Regular Cost Overtime Forrester Total Cost
Jan 660 800 -140 25000 0 0 25000
Feb 550 800 -250 25000 0 0 25000
Mar 1100 800 300 25000 18750 0 43750
Apr 1320 800 520 25000 25000 15000 65000
May 715 800 -85 25000 0 0 25000
Jun 649 800 -151 25000 0 0 25000
Total Cost   208750

 

 

  1. b) Comment on the staffing level with five accountants. Was it a good decision to hire the additional accountant?

Ans:

With five accountants, the total cost is higher compared to the 1st plan of 4 CPA’s. So, I don’t think that it was a good decision to hire the additional accountant.