Question

Oriole Co., a law firm, had the following costs last year:

Direct professional labour			$	15,000,000
Overhead				20,250,000
	Total costs		$	35,250,000

The following costs were included in overhead:

Fringe benefits for direct professional labour			$	5,000,000
Paralegal costs				2,700,000
Telephone call time with clients (estimated but not tabulated)				600,000
Computer time				1,800,000
Photocopying				900,000
	Total overhead		$	11,000,000

The firm recently improved its ability to document and trace costs to individual cases. Revised bookkeeping procedures now allow the firm to trace fringe benefit costs for direct professional labour, paralegal costs, telephone charges, computer time, and photocopying costs to each case individually. The managing partner needs to decide whether more costs than just direct professional labour should be traced directly to jobs to allow the firm to better justify billings to clients.

During the past year, more costs were traced to client engagements. Two of the case records showed the following:

			Client Cases
				875			876
Direct professional labour			$	21,000		$	21,000
Fringe benefits for direct labour				2,900			2,900
Secretarial costs				2,100			6,300
Telephone call time with clients				1,000			1,800
Computer time				1,900			3,800
Photocopying				1,100			2,000
	Total overhead		$	30,000		$	37,800

Three methods are being considered for allocating overhead this year:

1. Allocate overhead based on direct professional labour cost. Calculate the allocation rate using last year’s direct professional labour costs of $15,000,000 and overhead costs of $20,250,000.
2. Allocate overhead based on direct professional labour cost. Calculate the allocation rate using last year’s direct professional labour costs of $15,000,000 and overhead costs of $9,250,000 ($20,250,000 less $11,000,000 in direct costs that are traced this year).
3. Allocate the $9,250,000 overhead based on total direct costs. Calculate the allocation rate using last year’s direct costs (professional labour of $15,000,000 plus other direct costs of $11,000,000).

Compute the overhead allocation rate for method 1.

Method 1 overhead allocation rate

%

of direct professional labour cost

Compute the overhead allocation rate for method 2. (Round to 1 decimal place, e.g. 17.5%.)

Method 2 overhead allocation rate

%

of direct professional labour cost

Compute the overhead allocation rate for method 3. (Round to 1 decimal place, e.g. 17.5%.)

Method 3 overhead allocation rate

%

of total direct costs

Using each of the three rates computed for Method 1, 2, and 3, compute the total costs of cases 875 and 876. (Round all entries to whole amounts, e.g. 5,275.)

		Method
		1			2			3
Total Costs Assigned		$			$			$

Answer 1

From the information given above, I have computed allocation of overhead cost under 3 methods and total costs of cases 875 and 876 using all 3 methods.

Method 3 1 Oriole Co 2 Method 1 3 1. Calculation of overhead allocation cost based on direct professional labor cost. 4 Information given in the problem 5 Direct professional labor cost: 15000000 6 Overhead costs: 20250000 3. Calculation of overhead allocation cost based on Total direct cost. Information given in the problem Direct professional labor cost: 15000000 Other Direct costs 11000000 Total direct costs 26000000 Overhead costs: 9250000 ($20250000 less $11000000 in direct costs that are traced this year) Overhead aloocation rate: Overhead costs Total Direct cost 0.36 *100 3 6 9250000 26000000 8 Overhead aloocation rate: Overhead costs 20250000 1.35 *100 1 35 % 10 Direct professional labor cost 15000000 11 12 Method 2 13 2. Calculation of overhead allocation cost based on direct professional labor cost. 14 Information given in the problem 15 Direct professional labor cost: 15000000 16 Overhead costs: 9250000 17 ($20250000 less $11000000 in direct costs that are traced this year) 18 19 Overhead aloocation rate: 20 Overhead costs 9250000 0.62 *100 62 % 21 Direct professional labor cost 15000000 22 23 24

W X 1 Computation of total costs of cases 875 and 876 using rates computed for allocation of overhead 2 under Method 1, 2 and 3. Method 1 Method 2 Method 3 135% 62% 35% 21000 21000 21000 28350 13020 10800 (21000*135%) (21000*62%) (30000*36%) Client Case 876 Particulars Overhead rate Direct professional labor cost Overhead allocation Method 1 Method 2 Method 3 135% 62% 36% 21000 21000 21000 28350 13020 13608 (21000*135%) (21000*62%) (27800*36%) 4 Client Case 875 5 Particulars 6 Overhead rate 7 Direct professional labor cost 8 Overhead allocation 9 10 Other direct costs 11 Fringe benefits for direct labour 12 Secretarial Costs 13 Telephone call time with clients 14 Computer time 15 Photocopying 16 Total nil nil nil nil nil 2900 2100 1000 1900 1100 9000 nil Other direct costs Fringe benefits for direct labour Secretarial Costs Telephone call time with clients Computer time Photocopying Total 2900 2100 1000 1900 1100 9000 2900 6300 1800 3800 2000 16800 2900 6300 1800 3800 2000 16800 nil nil nil 17 40800 Total costs 49350 50820 51408 18 Total costs 49350 43020 19 20 Note: Under Method 3, overhead aloocation 30000*36% 21 given in problem refer table client cases 22 Direct professional labor cost 21000 23 Other direct costs 9000 24 Total direct costs 30000 25 Note:Under Method 3, overhead aloocation 37800*36% given in problem refer table client cases Direct professional labor cost 21000 Other direct costs 16800 Total direct costs 37800