Question

Winder, Knotter, and Nale is a small law firm that has 10 partners and 10 support people. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments-the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the current year, the firm's management made the following estimates for the year: Department Litigation Research-hours Direct lawyer-hours Materials and supplies Direct lawyer cost Departmental overhead cost Research and Documents 21,600 9,00 $ 21,200 $460, 600 $734,400 17,600 $ 6, 600 $880,000 $264,000 The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct lawyer cost. The costs charged to each client are made up of three elements: materials and supplies used, direct lawyer costs incurred, and an applied amount of Overhead from each department in which work is performed on the case. Case 618-3 was initiated on February 10 and completed on June 30. During this period, the following costs and time were recorded on the case: Department Research and Documents Litigation Research-hours Direct Lawyer-hours Materials and supplies Direct lawyer cost 25 $ 82 $1.125 $ 46 $2.00 Required: 1. Compute the predetermined overhead rate used during the year in the Research and Documents Department Compute the rate used in the Litigation Department. Predetermined Overhead Rate Research & Documents department Litigation department per hour

Answer 1

1) Research and Document Department Litigation Department Predetermined overhead Rate $34 per hour 30% % Workings: Predetermined Overhead Rate = Estimated total manufacturing overhead cost / Estimated total amount of the allocation base Research and Document Department = $734,400/21,600 research hours $34 per research hour Litigation Department = $264.000 / $880,000 direct lawyer cost 30% direct lawyer cost 2) The totaloverhead cost applied to Case 618-3: $1.156 Research and Document Department (34 research hours * $34 per hour) Litigation Department ($2.900 * 30%) Total overhead cost applied $870 $2,026 3) Total Materials and supplies Direct attorney cost Overhead cost applied Total Cost Department Research and Litigation Document $82 $46 $1.125 $2,900 $1.156 $870 $2.363 $3,816 $128 $4.025 $2.026 $6,179 4) Research and Document Department Litigation Department $36.750 Overapplied $7.920 Underapplied Workings: Research and Document Department : Overhead applied Predetermined overhead rate * Research-Hours = $34 per research hour * 24,500 research hours = $833.000 Overapplied overhead cost = Overhead applied - Actual overhead cost = $833,000 - $796,250 $36.750 Litigation Department: Overhead applied = Predetermined overhead rate * Direct lawyer cost = 30% * $794.600 = $238,380 Underapplied overhead cost = Actual overhead cost - Overhead applied = $246,300 - $238.380 $7.920