Question

Brady Associates is a recently formed law partnership. Brady A6operates at capacity and uses a cost based approach to pricing (billing) each job. Currently it uses simple costing system with a single direct cost category (professional labor hours) and a single indirect cost pool (general support). indirect costs are allocated to cases on the basic of professional labor hours per case. The job files for two Brady's clients, Janek Enterprises and Quartz Inc,

rate per professional la Janek Enterprises Quartz Inc. rate. Then enter the ar Professional labor 2,800 hours 2,200 hours Professional labor costs at Brady Associates are $150 an hour. Indirect costs are allocated to cases at $110 an hour. Total indirect costs in the most recent period were $550,000 Indirect-cos Total cost of the jobs using the simple costing system are as follows: Direct professional labor Indirect costs allocated Janek Enterprises $ 420,000 $ 308,000 $ 728,000 $ Quartz Inc 330,000 242,000 572,000 Total Print Done swer

1. Calculate the revised indirect cost allocation rate per profit labor hour for Brady Associates when total indirect costs are $250,000.
2. Computer the costs of the Janek Enterprises and Quartz Inc jobs if Brady Associates had used its refined costing system with multiple direct cost categories and one indirect cost pool.
3. Compare the costs of Janek Enterprises and Quartz Inc jobs in requirement 2 with those calculated using the simple costing system. Comment on the results.

Answer 1

1. Revised indirect cost allocation rate = Total indirect costs/Total professional labor hours = $250000/(2800 + 2200) = $250000/5000 = $50 per professional labor hour

2.

	Janek Enterprises	Quartz Inc.
Direct professional labor	420000	330000
Other direct costs	67500	232500
Indirect costs (2800 x $50);(2200 x $50)	140000	110000
Total cost $	627500	672500

3. Janek Enterprises job is over-costed by ($728000 - $627500) = $100500 and the Quartz Inc. job is under-costed by ($672500 - $572000) = $100500 using the simple costing system as against the refined costing system.