Question

Vrabel Associates is a recently formed law partnership. Kristine Higgins, the managing partner of Vrabel Associates, has just finished a tense phone cam with Kobe Jabar president of Jabar Enterprises. Kobe strongly complained about the price Vrabel charged for some legal work done with his company.

Higgins also received a phone call from it's only other client, Clinical, Inc, which was very pleased with both the quality of the work and the price charges on it's most recent job.

Vrabel Associates operates at capacity and uses a cost based approach to pricing (billing) each job. Currently it uses a 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 basis of professional labor hours per case. The job files show the following:

                                Jabar Enterprises            Clinical Inc
Professional labor           3,100 hours          1,900 hours

Professional labor costs at Vrabel Associates are $230 an hour. Indirect costs are allocated to cases at $95 an hour. Total indirect costs in the most recent period were $475,000.

1. Why is it important for vrabel Associates to understand the costs associated 2irh individual jobs?
2. Compute the costs of the Jabar Enterprises and Clinical Inc jobs using Vrabel's simple costing system.

Answer 1

Answer 1

It is important to understand the cost associated with 2 individual jobs because the selling price needs to be fixed separately and so individual costs must be calculated so that profit can be added to cost to calculate the selling price.

Answer 2

	Jabar Enterprises	Clinical Inc
Professional cost	$                       230	$           230
Indirect cost	$                         95	$             95
Total cost per hour	$                       325	$           325
Hours	3,100	1,900
Total cost	$            1,007,500	$   617,500

In case of any doubt, please comment.