Question

Dingus& Carter use job costing to assign overhead costs to clients. Next month, the labor hours for junior partne rlawyers and senior partner lawyers in the San Diego office are budgeted at4,000 hours and 2,000 hours, respectively. The budgeted indirect cost pools (mostly support staff salaries, as secretaries and paralegals work exclusively for only one group)for each group for the month are$168,000 and $132,000, respectively. In addition, there is an office-wide overhead cost pool of $1,200,000 (lease, utilities, materials) that is allocated on the basis of total labor hours, which are budgeted at 15,000 for the next month (junior partner hours, senior partner hours, and staff lawyer hours).Assume that staff lawyers do not have access to help from secretaries and paralegals, and that Dingus & Carter pay staff lawyers $40 per hour, junior partners $50 per hour, and senior partners $100 per hour.

a.Estimatethetotal overhead costs allocated to client Stacy McDonaldnext month. Assume Stacy’s case requires 10 hours of work from junior partners, 3 hours of work from senior partners, and 30 hours of work from staff lawyers.

b.Assume that actual labor hours for staff lawyers,junior partners,and senior partners in the next month turn out to be 7,000, 4,500 and 1,800, respectively. If Dingus & Carter allocated overhead on the basis of budgeted cost allocation bases, how much does overhead applied vary from actual overhead(assuming that actual overhead costs equal budgeted levels). Is overhead underapplied or overapplied?

c.Recalculate the overhead costs allocated to Stacy McDonald(part a.)for next month, assuming that late this month the staff lawyers receivea raise to $45 per hour.

Answer 1

Working Amount Allocation Base Quantity Budgeted Support Staff- Junior Lawyer Budgeted Support Staff- Senior Lawyer Budgeted Office wide OH cost А $ 168,000 Junior Lawyer hours $ 132,000 Senior Lawyer hours $ 1,200,000 Total hours Pre-determined rate A/B $ 42 $ 66 $ 80 B 4000 2000 15000 Requirement a Allocation of OH costs to client Stacy McDonald Cost Drivers Driver Qty Junior lawyer hours 10 Senior lawyer hours 3 Total hours (10+3+30) Total Overhead allocated Pre-determined Cost rate Allocation $ 42 $ 420 $ 66 $ 198 80$ 3,440 $ 4,058 43 Requirement b Driver Qty Computation of Applied Overhead Cost Drivers Junior lawyer hours Senior lawyer hours Total hours (7000+4500+1800) Total Overhead allocated 4500 1800 13300 Pre-determined Cost rate Allocation $ 42 $ 189,000 $ 66 $ 118,800 $ 80 $ 1,064,000 $ 1,371,800 Computation of Actual Overhead Budgeted Support Staff- Junior Lawyer Budgeted Support Staff- Senior Lawyer Budgeted Office wide OH cost Total Actual Overhead (Since Actual = Budgeted) $ 168,000 $ 132,000 $ 1,200,000 $ 1,500,000 Since, applied overhead is less than actual overhead, The Overhead is underapplied by $ 128,200. Requirement c The Overhead costs are allocated based on the hours worked and not on the labor cost. So, when the staff costs per hour increases to $45 per hour, this would not change the no. of hours worked. Hence, the overhead allocation to Stacy remains same as in Part a.