Question

Problem 1 (25 points) You are a consultant that has been asked by a law firm to compare their traditional costing system with an activity based costing system. You have gathered the following information relative to the operations of the firm INFORMATION RELATED TO OPERATIONS OF LAW FIRM Partner Labor Associate Labor Number of attorneys 20 5 Annual billable hours per attorney 2,000 2,000 100,000 Annual compensation per attorney 250,000 S S The annual estimated overhead per activity center is provided below. INFORMATION RELATED TO ESTIMATED OVERHEAD TO EACH ACTIVITY CENTER Secretarial Support Legal Support 2.500,000 S Annual estimated overhead 1,000,000 You are going to analyze two jobs for the firm: the Smith job, which will require 50 partner hours and 20 associate hours; and the Jones job, which will require 15 partner hours and 55 associate hours REQUIRED: ( Using a traditional costing system, determine the following amounts Cost of each job, assuming that overhead is allocated to jobs using (a) total professional labor hours as the activity base. Round your calculations to the nearest whole dollar Amount that should be billed to each customer, assuming that the firm bills customers at a 25% markup on cost. Round your calculations to the nearest whole dollar (b) Using an activity based costing system, determine the following amounts Cost of each job, ass uming that overhead is allocated to jobs by using one rate for legal support using associate labor hours as the activity base and another rate for secretarial support using partner labor hours as the activity base. Round your calculations to the nearest whole dollar Amount that should be billed to each customer, assuming that the firm bills customers at a 25% markup on cost. Round your calculations to the nearest whole dollar. (2) (a) (b)

Answer 1

1. Computation of Job cost and billed amount for Smith Job and Jones Job Jobs using company's traditional costing system:-
Computation of overhead rate :-
	Estimated Total Overheads	2500000+1000000	=	$                3,500,000
	Total professional labor hours	(2000*5)+(2000*20)	=	50000
	Overhead rate		=	Estimated Total Overheads
				Total professional labor hours
			=	$3,500,000
				50000
			=	$70.00	per professional labor hour
(a) Computation of Cost :-
	Job	Activity Driver		Plantwide OH Rate		Overhead Cost
	a	b		c		d = b×c
	Smith Job	70	Professional hours	$70.00	per professional labor hour	$4,900
	Jones Job	70	Professional hours	$70.00	per professional labor hour	$4,900
(b) Computation of Amount that should be billed to customer :-
				Job
				Smith Job	Jones Job
	Cost			$                        4,900	$                                   4,900
	Add: Markup @25%			$                        1,225	$                                   1,225
	Billed amount			$                       6,125	$                                  6,125
2. Computation of Job cost and billed amount for Smith Job and Jones Job Jobs using activity based costing system:-
Computation of Cost per driver :-
Activity cost pool	Activity measures (Cost Drivers)	Estimated Overhead Cost	Expected Activity			Cost per driver
			No. of attorneys	Annual billable hours per attorney	Total
a	b	c	d	e	f = d*e	g = c/f
Legal Support	Associate labor hours	$                  2,500,000	20	2,000	40,000	$                                 62.50
Secretarial Support	Partner labor hours	$                  1,000,000	5	2,000	10,000	$                                    100
Total Overhead Cost		$                  3,500,000
(a) Computation of Cost :-
	Overhead Assigned	Activity Driver			Cost per driver	Total Overhead Cost
	a	b			c	d = b×c
	Smith Job
	Legal Support	20	Associate labor hours		$                                  62.50	$                                 1,250
	Secretarial Support	50	Partner labor hours		$                                100.00	$                                 5,000
					Total Cost	$                                 6,250
	Jones Job
	Legal Support	55	Associate labor hours		$                                  62.50	$                                 3,438
	Secretarial Support	15	Partner labor hours		$                                      100	$                                 1,500
					Total Cost	$                                 4,938
(b) Computation of Amount that should be billed to customer :-
				Secretarial Support
				Jones Job	Legal Support
	Cost			$                        6,250	$                                   4,938
	Add: Markup @25%			$                        1,563	$                                   1,234
	Billed amount			$                       7,813	$                                  6,172

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