Question:
Comparisons of a simplified costing system with an activity based system (continuation of E9-5 and E9-6):
Prior to instituting an activity-based costing system, Harris and Whelan, the attorneys in E9-5 and E9-6, utilized a simplified costing system with one direct cost category, professional labor, and one indirect cost category, professional support. The average wage rate for professional labor was $75 per hour, and the overhead rate for professional support was $67.50 per professional labor hour. Compute the job cost for Carolyn Goode, the client in E9-6, using the simplified costing system, and determine the difference between it and the job cost using activity-based costing in E9-6 and discuss the reasons for the difference.
Computing activity-based costing rates:
The partners of Harris and Whelan, attorneys-at-law, decide to implement an activity-based costing system for their firm. They identify the following three cost pools and budgeted amounts for each for the coming year: fringe benefits, $450,000; paralegal support, $250,000; and research support, $650,000. It is determined that the best cost driver for fringe benefits is professional labor dollars ($1,500,000); paralegal support is partner labor hours (4,000); and research support is professional labor hours (20,000). Compute the budgeted overhead rates for each of the three cost pools.
Job cost for a client (continuation of E9-5):
A client, Carolyn Goode, requires 10 partner labor hours and 25 professional associate hours from Harris and Whelan, the law firm in E9-5. Partners are paid $125 per hour, and associates make $60 per hour. Compute the job cost of servicing Carolyn Goode.