Question

The law firm of Duwe, Cheatem & Howe provides legal services for clients. During the year, corporate clients required 5,000 hours of legal services, while individuals required 3,000 hours. The firm has traditionally used direct labor hours to assign overhead. However, Ms. Duwe believes services to businesses cost more than services to individuals and wishes to adopt activity-based costing. The firm's revenues and costs for the year are shown below: Corporate $150,000 Individual $150,000 Tota $300,000 $100,000 50,000 $150,000 Revenue Expenses: Lawyers' salaries Overhead: Filing Quality control Data entry Total overhead 10,000 5,000 25,000 $40,000 Mr. Cheatem has kept records of the following data for use in the new activity-based costing system: Overhead Cost Activity Level Corporate Individual Cost Driver Filing Quality control Number of Clients Number of hours spent Number of pages entered 5 75 1,000 5 25 1,500 Data entry

1.What is the overhead allocation rate using the traditional direct-hour allocation base?

2. What is the net income for the Corporate client services segment using the traditional direct-hour allocation base?

3. What is the net income for the Corporate client services segment using the three cost drivers in the ABC model?

4.What is the total net income for the firm using the traditional direct-hour allocation base?

5.What is the total net income for the firm using the three cost drivers in the ABC model? .

Answer 1

1. Overhead allocation rate= Total overhead/Total hours= 40000/8000= $5
2. Net income for corporate client using traditional labour hour allocation rate
Revenue	150000
Less: Expenses
Lawyer's salaries	-100000
Overhead	-25000
(5000 hours*5)
Net income	25000
3. Net income for corporate client using ABC model
Revenue	150000
Less: Expenses
Lawyer's salaries	-100000
Overhead
Filing (10000*5/10)	-5000
Quality control (5000*75/100)	-3750
Data entry (25000*1000/2500)	-10000
Net income	31250
4. Total net income of firm using traditional overhead rate allocation method
	Corporate	Individual
Revenue	150000	150000
Less: Expenses
Lawyer's salaries	-100000	-50000
Overhead	-25000	-15000
(5000 hours*5)	(5000 hours*5)	(3000hours*5)
Net income	25000	85000