Problem - Walters and Witt, a law firm, is analyzing the profitability of its cases. During the year, the firm represented the Umberg Company in numerous routine legal issues, for which it charged a monthly retainer fee of $2,500. Budget information for the firm follows:
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Professional labor:
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Partners
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$ 500,000
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Associates
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900,000
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Paralegals
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600,000
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Total
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$2,000,000
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Overhead:
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Secretarial salaries
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$ 900,000
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Depreciation of office equipment
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300,000
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Fringe benefits
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400,000
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Lease expense
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200,000
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Utilities
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300,000
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Communication expenses
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250,000
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Office supplies
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150,000
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Total
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$2,500,000
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Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Actual time spent for the Umberg cases follows:
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Actual
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Partners
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23 hours
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Associates
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42 hours
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Paralegals
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72 hours
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In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for $1,000 of direct costs.
Walters and Witt uses activity-based costing to determine the cost of its cases. With a consultant's help, the firm has developed the following information about cost pools:
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Cost Pool
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Expenses Included
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Cost Allocation Base
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Secretarial support
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Secretarial salaries
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Partner labor hours
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Fringe benefits
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Fringe benefits
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Professional labor dollars
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Office support
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Depreciation, lease, utilities, communications and supplies
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Professional labor hours
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(a) Compute the budgeted rate per unit of cost driver for each cost pool.
(b) Using activity-based costing, compute the cost of the Umberg work this year.
(c) Compute the profit that Walters and Witt had on the Umberg work this year.